PubFinCriteria_2006_part1_final1.qxp

on subordinate multifamily pool tranches, in which

case the rating on that tranche would be the credit

rating of the rated HFA.

Standard & Poor’s uses the same methodology

for analyzing credit support levels for HFA afford-

able multifamily housing pools as for conduit

pools. Because many HFAs have a long track record

of excellent underwriting and asset management

capabilities, Standard & Poor’s will rely to a certain

extent on the issuer’s representations regarding cal-

culations of DSC and LTV, property quality and

condition, and strength of ownership and manage-

ment. Standard & Poor’s will also give management

credit to HFA’s with strong asset management

departments that can identify financial and manage-

ment problems early, seek rent increases and sub-

sidy extensions, and work out troubled loans.

Construction Risk In

Affordable Multifamily Housing Pools

Housing Finance Agency pools

Many HFAs have parity bond indentures or guar-

antee funds that finance new construction of

affordable multifamily housing projects. HFAs have

incurred minimal credit losses on these transactions,

either during the construction/lease up phase or

during the permanent phase thereafter. HFA’s typi-

cally service their own mortgage loans on projects

under construction or hire outside mortgage loan

servicers to do the servicing. The agencies or out-

side servicers frequently review construction draws

and make site visits to monitor construction

progress. Procedures may vary from HFA to HFA

but frequently the HFAs have engineers on staff to

review construction progress on projects. It is very

rare that a multifamily project financed by an HFA

does not get completed.

HFA’s typically have a good history in financing

projects that achieve stabilization at targeted debt

service coverage levels. Most projects financed

today by HFAs are usually LIHTC multifamily

projects, which though they are typically non-

recourse financings have the advantage of having

deep pocket limited partners who have tax incen-

tives to keep multifamily projects out of default, at

least during the life of the LIHTCs. In the event

that projects do have financial problems or go into

default, HFAs have resources to mitigate these

defaults, such as parity indenture fund balances and

funds to make subordinate mortgage loans or

grants. Due to the long history of excellent per-

formance on projects with construction/lease up

risk and their systems in place, Standard & Poor’s

has become very comfortable with the HFAs taking

construction risk on affordable multifamily housing

projects and will rate parity bond indentures that

do not have credit enhancements on projects under

construction.

If an HFA can demonstrate a positive experience

with construction risk, as well as underwriting,

oversight and construction procedures as outlined

above, Standard & Poor’s will assume low con-

struction risk and look to bond cash flows to model

construction risk. Bond cash flows should be run as

in accordance with Standard & Poor’s construction

criteria (see “Public Finance Criteria: Assessing

Construction Risk”). HFA parity indenture cash

flows must demonstrate that bond debt service can

be paid assuming construction delays. If bond cash

flows do not demonstrate sufficient resources to

support the bonds during the delay period, the HFA

must identify other sources of financial support.

Conduit pools

More and more conduit programs have arisen to

fund construction and permanent financing of mul-

tifamily pools. These typically take the form of,

taxable debt obligations secured by pools of afford-

able multifamily mortgages issued by non-tax

exempt issuers using a REMIC (Real Estate

Mortgage Investment Conduit); or tax-exempt pass

through debt obligations secured by pools of

affordable housing tax exempt bonds issued by

Affordable Multifamily Housing Pooled Financings

http://www.standardandpoors.com 275

As part of the rating process, Standard & Poor’s will perform a detailed review of
the individual properties in the pool, based on the following information:

■Project name and address

■Project owner/sponsor

■Type of affordable housing project: e.g. LIHTC, project-based Section 8,

tenant-based Section 8, 80/20, Section 236, Section 202, 501c3, military housing,

student housing, assisted living, etc.,

■Number of units

■Age of property

■Original principal balance of loan/bond

■Current principal balance of loan/bond at cutoff date

■Interest rate on loan/bond

■Amortization period of loan/bond

■Maturity date of loan/bond and balloon payment, if any

■Prepayment terms for the bonds, if any

■Amount and investment of debt service reserve funds, if applicable

■Seasoning of loan/bonds

■Loan history of loan/bonds

■Three years of net operating income of property

■Trust indenture/loan agreement, mortgage, note, if applicable

■Third party reports: appraisal, property condition reports, and

environmental study

Information Requirements