30-year loans prepaying at the appropriate rapid
speed in accordance with the rating, assuming there
are no prepayments on the 40-year loans. This
would indicate whether the indenture could main-
tain debt service payments with the support of 40-
year loans alone.
Third-party verification
Standard & Poor’s may request that final cash flow
analysis be verified by an independent third party,such as a nationally recognized accounting firm,
bond firm, or other expert in the field. This would
occur if the cash flow provider did not have a track
record of providing cash flows for a particular type
of transaction. Once a history of accurate cash
flows has been established, third-party verification
will not be requested.
Variable rate bonds
Standard & Poor’s assumes that many interest rate
swaps and caps, or short-term assets are imperfect
hedges for variable rate mortgage revenue bonds
principally due to basis, amortization, and
rollover risk. Other risks, such as termination, tax
event and counterparty risk can also become risks
in these structures, but are less common. For these
reasons, cash flow projections for mortgage rev-
enue bonds should also incorporate appropriate
risks of variable rate debt, interest rate swaps, and
interest rate caps.
All risks identified under swap and cap contracts
by Standard & Poor’s should be incorporated into
the cash flow modeling projections as expenses or
“additional” interest due on bonds. Reserve fund-
ing or interest rate spread should be shown to
cover any shortfalls produced as a result of the
modeling. Alternatively, Standard & Poor’s can
assess shortfalls to an agency’s capital adequacy
calculation if the bonds benefit from a GO pledge.
Variable rate bonds should be modeled as fol-
lows in cash flow projections. “Net” variable rate
bond interest should be modeled at the lesser of
the high stress interest rates forecast by
Standard & Poor’s interest rate model, or the
maximum interest rate as stated under the bond
documents. Standard & Poor’s defines the net
variable rate bonds for mortgage revenue bonds as
those bonds with no synthetic hedge (swaps or
caps) or natural hedge (short term or variable rate
assets) as well as the amount of “hedged” bonds
subject to tax risk, amortization risk, and rollover
risk. Hedged debt should include an additional
run using the low stress interest rates from
Standard & Poor’s for the highest prepayment sce-
nario that applies to an indenture. This run would
illustrate how well the cash flows perform when
the swap counterparty makes the smallest pay-
ments on swaps that are based on standard inter-
est rate indices. Lower interest rates would result
in lower payments from swap counterparties, and
high loan prepayments would accompany low
interest rates. Standard & Poor’s may request low
interest rate assumptions on different prepayment
runs for unique bond structures and to monitor
the strength of an indenture over time. For addi-
tional information, please refer to “Public Finance
Criteria: Municipal Swaps.”Single-Family Whole Loan Programshttp://www.standardandpoors.com 237Small State/Large County
A
LTV 100 97 95 90 80
FF 38 35 32 16 11
FC 22 22 22 22 22
MVD 29 29 29 29 29
BBB
LTV 100 97 95 90 80
FF 19 18 16 8 5
FC 22 22 22 22 22
MVD 25 25 25 25 25Small County/City
AAA
LTV 100 97 95 90 80
FF 75 75 67 22 22
FC 22 22 22 22 22
MVD 53 53 53 53 53
AA
LTV 100 97 95 90 80
FF 60 60 53 27 18
FC 22 22 22 22 22
MVD 47 47 47 47 47
A
LTV 100 97 95 90 80
FF 50 47 43 21 14
FC 22 22 22 22 22
MVD 39 39 39 39 39
BBB
LTV 100 97 95 90 80
FF 37 35 32 16 11
FC 22 22 22 22 22
MVD 34 34 34 34 34LTV—Loan to value. FF—Foreclosure frequency. FC—Foreclosure costs.
MVD—Market value decline.Table 2Loss Coverage Criteria (%)(continued)