PubFinCriteria_2006_part1_final1.qxp

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atings on tax-exempt housing bonds rely on the

following factors:

■Credit quality of mortgage collateral, including

credit quality of mortgage insurers and guaran-

tors, property insurers, and rent subsidy

providers;

■Credit quality of other income streams, such as

federal, state and local funding sources.

■Adequacy of reserve levels needed to provide a

safety net for interruptions in debt service attrib-

utable to delinquency, default, and foreclosure;

■Credit quality of investments of all funds held for

the benefit of bondholders;

■Sufficiency of cash flow to make bond payments

under expected, as well as stress, scenarios;

■Ability of legal provisions to protect the flow of

funds to bondholders under all circumstances;

and

■The ability of an issuer, obligor and trustee to

administrate its programs effectively.■

Introduction To

Tax-Exempt Housing Bonds

230 Standard & Poor’s Public Finance Criteria 2007

S

tandard & Poor’s Ratings Services rates single-

family mortgage revenue bonds backed by whole

loans or loans securitized by the Government

National Mortgage Association (Ginnie Mae), the

Federal National Mortgage Association (Fannie

Mae), and the Federal Home Loan Mortgage Corp.

(Freddie Mac). Please refer to, “Public Finance

Criteria: Single-Family Mortgage-Backed Securities

Programs,” for criteria specific to these MBS pro-

grams. Standard & Poor’s approach to rating whole

loan MRBs focuses on six areas of analyses: quality

of mortgage loans, insurance, cash flow analyses,

reserves and investments, legal provisions, and pro-

gram management.

Quality Of Mortgage Loans

The primary factors used to assess asset quality

include property type, type of loan, loan-to-value

(LTV) ratio, portfolio size, and economic conditions

within the lending area. These factors indicate a

portfolio’s vulnerability to delinquencies, defaults,

and possible deterioration in market values. In addi-

tion, due to anti-predatory lending legislation now

in place in many states, Standard & Poor’s will look

for possible risk exposure in the loan portfolio

based on the specific issuer’s potential liability.

Property type

Historically, MRB issuers have restricted their port-

folios to single-family, owner-occupied detached

dwelling units. The targeting of money for other

types of homes such as two-to-four unit homes, co-

ops, and condominiums may occur to address the

specific housing needs. Standard & Poor’s rating

analysis factors in the increased risks associated

with these product types.

Types of loans

The standard high quality, least risky loan portfolio

consists of 30-year level-pay, fixed-rate, first-lien,

fully amortizing mortgages on single-family residen-

tial properties. Standard & Poor’s considers rehabil-

itation loans, construction loans, second-or

third-lien mortgages, bought-down mortgages, and

tiered-payment mortgages to be significantly riskier.

More recent product lines such as interest-only

loans, 40-year mortgages, second loans and piggy-

back loans also have a higher risk profile.

LTV ratio

LTV ratios are an important determinant of the

likelihood of default. Higher LTV loans will have

a higher assumed foreclosure frequency (FF)—a

critical determinant of loss coverage. Programs

Single-Family Whole Loan Programs ................................................................................

Housing