whether the project has a good chance to be
extended and, if so, will analyze using rents which
are the lesser of rents affordable to tenants making
60% of HUD median income or local HUD Fair
Market Rents (assuming tenant pays 30% of
income for rent). Standard & Poor’s will also use
higher cap rates and lower default thresholds than
unsubsidized affordable multifamily in determining
loss coverage.
Standard & Poor’s may also be able to make the
assumption that a certain portion of the expiring
Section 8 projects can make a successful transition
to unsubsidized status. These may include proper-
ties that, already have a significant portion of
unsubsidized units fully rented which demonstrate
their ability to attract unsubsidized tenants; or,
properties that compare favorably to other afford-
able multifamily projects in the area in location,
amenities, unit size, curb appeal and physical condi-
tion (properties that rank 3 or better by
Standard & Poor’s) and have strong ownership.
These transactions will be analyzed using the unen-
hanced affordable housing project debt criteria
assuming a successful transition. In order to deter-
mine that a successful transition can be made,
Standard & Poor’s would need to visit each site and
stress the pro formas with a two-year transition
period from subsidized to unsubsidized status
assuming that unsubsidized rents would be at a sig-
nificant discount to market. Section 8 transition
transactions that are included in pools will need
sufficient reserves to cover the transition period.
Standard & Poor’s will determine recovery rates for
Section 8 properties not assumed to transition to
unsubsidized status, on a case-by-case basis.
The low income housing tax credit program,
allows corporations and individuals to receive a
dollar for dollar credit against federal income tax
liability for 10 years, and requires the projects to
comply with the program rent restrictions through
the 15 year compliance period. For LIHTC proper-
ties, Standard & Poor’s will review the overall pool
to determine if there is a concentration of program
termination risk in any given year. Pools with a sig-
nificant number of loans with maturities greater
than 15 years may suffer unique stress if all, or a
number, of properties are required to be sold in
year 15. Sales of properties frequently result in a
drop off in net operating income. Pools with signifi-
cant properties that are sold in the same period
may see such a drop in average NOI (net operating
income) affecting debt coverage levels.
Subordination levels for such pools may need to be
adjusted to reflect the fact that, in reality, the assets
have balloon maturities tied to a sale of the proper-
ty rather than are fully-amortizing.Mortgage loan seasoning and mortgage
payment delinquency history
Standard & Poor’s will review pool statistics for
mortgage seasoning (the period since the origination
of the mortgage) and the payment history of the bor-
rowers. Mortgages with shorter seasoning periods
may have the underlying property NOI’s haircut dur-
ing the individual property review process. Pools
with significant delinquency histories may receive
lower ratings, or need higher collateralization level
for similar pools with better delinquency history.Determination Of Loss Coverage
Standard & Poor’s will value the assets in the pool
and determine loss coverage levels by rating catego-
ry, by computing a DSC and LTV for each property.
Based largely on the LTV or DSC, Standard &
Poor’s will determine the aggregate credit risk asso-
ciated with the loan portfolio and the resulting
default rates that must be survived to obtain a
given rating level. Default rates are then adjusted
for recovery assumptions and a lost interest amount
is added to account for anticipated failure to receive
interest until recovery is complete. Loss coverage
can be provided through over-collateralization (typ-
ically used by HFA pools) or subordination of sub-
ordinate debt tranches. Standard & Poor’s may
adjust computed loss coverage levels due to pool
size, property type, lack of significant geographic
and owner diversification, lack of pool mortgage
seasoning, and significant affordable housing pro-
gram termination risk.
Under higher rating scenarios, higher default
rates are assumed, as compared to default rates
under lower rated scenarios. In addition, in terms
of recovery of principal and years of lost interest,
Standard & Poor’s applies higher stresses at the
higher rating categories, and less at the lower rat-
ings. The severity of the loss incurred in connection
with each default depends on analytical assump-
tions about expected default experience and the
specific characteristics of the loan in question. The
analytic assumptions relate to the decline in the
market value of the underlying real estate and to
the number of months between default and receipt
of liquidation proceeds. Here again assumptions
vary by property type and rating category. For
instance, at the higher rating categories,
Standard & Poor’s assumes that it will take the ser-
vicer longer to resolve a default on the underlying
property, than in the lower rated categories.
The number of months between the borrower’s
default and the servicer’s receipt of liquidation pro-
ceeds is used in combination with the loan coupon
to estimate the amount of lost interest associated
with a default. The other loan characteristic that hasHousing272 Standard & Poor’s Public Finance Criteria 2007