an influence on loss severity is the extent of amorti-
zation. In the case of interest only loans, it makes no
difference whatever defaults occur shortly after the
loans are securitized or when the loans mature: in
either case there will have been no amortization of
principal to help to absorb the loan losses. In the
case of amortizing loans, the later the default occurs
in the life of the loan, the less severe the loss is
assumed to be as a result of the amortization.
This criterion applies except for one notable
exception. For LIHTC pools, the analysis focuses
much more on years of lost interest and less on
defaults and recoveries. This is as a result of the
impressive history of the program since it’s incep-
tion in 1986, whereby defaults are very uncommon.
A foreclosure on these properties would trigger a
loss or recapture of the tax credit benefits. The his-
tory has shown that there are a percentage of prop-
erties that don’t cash flow sufficiently to cover debt
service, and are supplemented by either reserves or
some other forms of capital infusions until the
properties can once again cover debt service from
operations. As a result, the analysis emulates this
phenomenon and assumes a certain percentage of
the properties in these pools will need capital infu-
sions, and that the infusions depending on the rat-
ing level will potentially be for a significant period
of time. As in the regular pool scenarios, the higher
the rating level the more stressful the assumptions,
and therefore higher level of reserves will be neces-
sary at higher rating levels, than at lower levels.
It should be noted that the basic variables on
which the model operates for all property types, are
stabilized net cash flow and market values for each
of the underlying properties as estimated by
Standard & Poor’s and as based on the criteria out-
lined above. Although these estimates are derived
from information provided by the issuer or the
sponsor, the Standard & Poor’s adjustments in con-
nection with its analysis may cause the estimates
themselves to look different from the numbers
reported by third parties.
Standard & Poor’s will review the pool legal doc-
umentation, both on the individual bond/mortgage
level and on the trust/partnership/REMIC level. See
Standard & Poor’s U.S. CMBS Legal and
Structured Finance Criteria located on http://www.stan-
dardandpoors.com. Individual mortgages and bond
indentures will be reviewed to ensure that the loan
documents properly reflect the cash flow assump-
tions of the pool.
Cash Flow Analysis
Once Standard & Poor’s determines the credit sup-
port necessary at different rating levels, then an
analysis is needed for the rating of the actual pool
debt obligations assuming certain prepayment
assumptions. Where the pool structure is a pass
through entity (REMIC, partnership or trust), the
interest rate of the debt obligations is based off the
weighted average coupon of the trust, and the
structure uses a “fast pay-slow pay” payment struc-
ture, the rating of the debt obligations is relatively
simple: the debt obligations get the rating based on
the subordination levels from Standard & Poor’s
internal model as adjusted.
The analysis is more complicated for pools with
loans which have various different coupon rates or
maturities, with pools with variable rate debt obli-
gations whose rate is pegged off an index different
than that of the certificates/bonds secured by the
pool (such is in common in HFA pools) or pools
that use a “pro rata pay” structure. In these cases,
Standard & Poor’s will review cash flow projec-
tions to ensure that, the debt obligations can be
paid on a timely basis under various scenarios; and,
that there is no overall degradation in pool credit
quality in the event that better performing loans
prepay and the resulting principal payments are
allocated to all pool classes, on a pro rata basis. In
these cases, additional cash flow runs may be neces-
sary and stress cash flow models may be requested.
The requested cash flow runs can vary depending
on the composition and characteristics of the pool,
and are also applicable for State Housing Finance
Agency multifamily parity resolutions.
Cash flow coverage scenarios
At the minimum, the following base case and stress
cash flow runs must be prepared:
Base case:
■All loans pay at stated interest rate and loans
with balloon maturities pay at balloon maturity
date with a 30-day lag in cash flows.
Stress cases:
■Selective low LTV loans prepay-all loans below
the average pool LTV with coupons above the
average pool coupon prepay at the end of the of
the loan prepayment lockout period.
■Selective high DSC loans prepay-all loans above
the pool average DSC with coupons above the
average pool coupon prepay at the end of the
loan prepayment lockout period.
■All LIHTC prepay scenario-all LIHTC transac-
tions prepay loans in the 15th year after being
placed in service.
■Massive prepayment scenario-all loans prepay at
the end of the individual loan lockout periods.
■High coupon prepay scenario-all mortgage loans
with coupons above the pool average loan
coupon prepay at the end of the loan prepayment
lockout periods.Affordable Multifamily Housing Pooled Financingshttp://www.standardandpoors.com 273