Housing270 Standard & Poor’s Public Finance Criteria 2007
P
ooling of affordable multifamily housing assets
gives issuers the benefits of economies of scale
and diversification, which can increase credit quali-
ty when compared to single-asset transactions.
Pooling is an efficient way for housing finance
agencies (HFAs), banks, mutual funds, low-income
housing tax credit (LIHTC) investors/sponsors and
conduit issuers to get higher ratings for affordable
multifamily transactions than would be possible for
single-asset transactions.
Affordable multifamily pool transactions depend
on the collective performance of multiple properties
located in a variety of markets and controlled by
separate borrowers. The ratings of pool transac-
tions are predicated on the notion that it is highly
unlikely that all of the properties will experience
declines in cash flow and value simultaneously, but
that, over the life of the transaction, some loans can
be expected to default, with resulting losses to the
collateral pool. Standard & Poor’s Ratings Services
determination of credit enhancement levels for pool
transactions is designed to estimate the frequency of
default with respect to the underlying assets and the
severity of the loss that is expected to be incurred in
conjunction with each default, given the character-
istics of the loans in the pool.
For each rating level, Standard & Poor’s uses an
internal model, to determine the minimum loss cov-
erage necessary by rating category. Potential losses
in a pool are typically covered in two ways. One is
through over-collateralization, whereby the pool
has sufficient assets over liabilities to cover poten-
tial losses. The other is through subordination,
whereby the higher rated debt is supported by debt
issued at the lower rated levels all the way down to
noninvestment-grade. Examples of other types of
coverage, include, a general obligation pledge for
HFA pools, or credit enhancement for other pools.
For the purposes of this article the three terms, loss
coverage, over-collateralization and subordination
are used interchangeably in describing the losses a
pool has to cover at different rating levels.
Pools of affordable multifamily housing debt
obligations are typically issued following one of
three basic structures:
■Bonds issued by municipal issuers such as HFAs
secured by affordable multifamily mortgages
under closed or open resolutions,
■Taxable debt obligations secured by pools of
affordable multifamily mortgages issued by non-tax exempt issuers using a REMIC (Real Estate
Mortgage Investment Conduit) structure, and
■Tax-exempt pass through debt obligations secured
by pools of affordable housing tax exempt bonds
issued by non-tax exempt issuers using some
other form of pass through legal structure.Qualifying For Affordable Multifamily Pool
Treatment In Rating Debt Obligations
In order to obtain large pool treatment for a pooled
transaction, the pool must contain at least 20 debt
obligations with 10 separate obligors. These trans-
actions typically, do not have one obligor represent-
ing more than 10% of the cutoff principal balance
of the mortgages or bonds in the pool. For applica-
tion of pool concentration rules, Standard & Poor’s
defines obligor as the ultimate borrower on the
debt obligation and not the tax-exempt issuer (in
the event that the issuer is a municipal tax-exempt
conduit issuer issuing the debt obligation on behalf
of a third party borrower.) As illustration, consider
the situation where a not-for-profit or public hous-
ing authority or tax credit limited partnership is the
legal owner of a project and the borrower under a
loan agreement or financing agreement.
The issuer of the tax-exempt bonds is a tax-
exempt municipal entity issuing the bonds as a con-
duit issuer and has no legal binding obligation to use
its own credit to pay debt service on the bonds. In
this situation, Standard & Poor’s considers the legal
owner of the project to be the borrower for concen-
tration rules and not the issuer. In certain tax-exempt
bond transactions, a municipal entity is the legal
owner of the multifamily property, as well as the
issuer of the bonds, and leases the property on a
long-term lease to a not-for-profit entity in order to
qualify the property for real estate tax exemption. In
these situations, Standard & Poor’s would still con-
sider the not-for-profit to be the borrower for appli-
cation of pool concentration eligibility.Individual Property Reviews
Standard & Poor’s will review the operating history
of properties in the pool. This review will consist of
an analysis of three years of audited financial state-
ments, which will be used to derive net cash flow,
and to assign an appropriate valuation to the prop-
erties. Property income will be reviewed for histori-
cal trends, and Standard & Poor’s will assume a
vacancy rate that is the greater of the actual vacancy