portfolio. For a senior/subordinated structure,
Standard & Poor’s must determine if there is a bona
fide distinction between the security of the senior
and subordinated liens. In the absence of a clear-cut
determination, Standard & Poor’s will issue the same
rating on each the senior and subordinated bonds.
Standard & Poor’s addresses seven key components
to substantiate a clear senior and junior position
with respect to bondholders’ liens: security pledge to
bondholders, additional bond provisions, redemption
provisions, flow of funds, default/cross-default,
bondholder rights and approvals, and miscellaneous
items.
Overcollateralization. Overcollateralization can
be used to cover loan losses in bond structures that
have only senior lien bonds. In such instances, addi-
tional collateral, such as cash and/or loans, is pro-
vided in the amount of the loss coverage necessary.
If the overcollateralization is in the form of addi-
tional mortgages, Standard & Poor’s will discount
the loss coverage on the loan pool to reflect poten-
tial losses on those loans as well. These cash flows
may require the deposit of additional collateral.
Liquidity coverage may not be covered by overcol-
lateralization unless it can be demonstrated that the
excess collateral is liquid.
Additional insurance
Condominium insurance. Single-family issues that
permit a significant percentage of condominiums
(10% or greater) should provide the following cov-
erage: Multiperil coverage, including fire, and
extended coverage on a replacement cost basis;
public liability for personal injury and property
damage resulting from accidents occurring in public
or common areas. Such insurance must contain a
“sever ability of interest” endorsement that pre-
cludes the insurer from denying the claim of a con-
dominium unit owner because of negligent acts of
the condominium owners’ association or other unit
owners; coverage against boiler explosion and othermachinery accidents; blanket flood insurance for
condominiums located within federally designated
flood areas; and a fidelity bond on the condomini-
um owners’ association for condominium develop-
ments of more than 30 units.
High-rise condominiums. For portfolios including
high-rise condominiums (buildings of five or more
stories), the issuer must obtain a special hazard insur-
ance policy. This policy insures the greater of 1% of
the portfolio or the sum of the aggregate portfolio
exposure in the top-two, high-rise condominiums.
Special hazard insurance. Standard & Poor’s
looks for insurance in an amount equal to twice the
largest loan in all single-family portfolios where a
pool insurance policy is used and special hazard
risks are excluded as claims payable under the poli-
cy. In establishing the two times policy, Standard &
Poor’s assumes that the two largest single-family
structures will be destroyed regardless of portfolio
size. The high-rise condominium criteria apply this
concept to the two largest property risks.
Title insurance. Representations that title insur-
ance policy are in place at loan closing for all mort-
gages must be in the financing documents.
Flood and earthquake insurance. Representations
that these types of insurance are in place on each
mortgage loan are necessary if the property is in a
federally designated flood or earthquake zone.Cash Flow Analysis
The first objective of cash flow analysis is to assess
the relative strength of the various revenue sources
generated by the program’s assets to cover sched-
uled debt service. The second is to ensure that pro-
gram assets are enough to cover the outstanding
bonds. The third objective is to evaluate the
resiliency of the issue to withstand various origina-
tion and prepayment scenarios.
Cash flow projections
Cash flow projections should include, at a minimum:
■Full origination of loans/0% PSA prepayment
experience. This minimum prepayment level may
be increased to as high as 30% PSA if an issuer
can provide historical evidence of prepayments
on loans in a seasoned indenture;
■Full origination of loans/100% PSA prepayment
experience;
■Full origination of loans/three-year average life of
the mortgage loans (typically 500%-750% PSA)
prepayment experience;
■Non-origination of all loans assuming a full
redemption of bonds on the date specified in the
bond documents in the event full origination does
not occur.Single-Family Whole Loan Programshttp://www.standardandpoors.com 235—Years until full redemption of bonds —
State HFA Local HFA or state
Interest rate (%) parity program HFA non-parity program
6.50 or lower 5.0 4.0
6.51 to 7.00 4.5 3.5
7.01 to 7.50 4.0 3.0
7.51 to 8.00 3.5 2.5
8.01 to 8.50 3.0 2.0
8.51 to 9.00 2.5 2.0
9.01 and higher 2.0 2.0Table 1 Rapid Prepayment Stress Run For ‘AAA’ Rated Issues