Cash flow assumptions
In submitting cash flows to Standard & Poor’s, the
following assumptions should be made:
Lag assumption.A 30-day lag (in addition to
normal arrearage) in receipt of mortgage payments
on newly originated and existing loans should be
reflected in the cash flows for structures rated ‘AA’
or below. Standard & Poor’s may require a lag
greater than 30 days depending on historical delin-
quency levels; this will be considered on a case-by-
case basis. Structures rated ‘AAA’ should reflect a
60-day lag. Standard & Poor’s defines a lag as a
delay in payment that is in addition to the normal
arrearage (the time period encompassed from the
date of mortgage origination until the first sched-
uled mortgage payment date.) For example, if a
mortgage is originated on September 1, the first
scheduled mortgage payment would be due on
October 1. Thus, cash flows incorporating a 30-day
lag would not reflect receipt of this payment by the
bond trustee until November 1.
Worst-case draw schedule.Origination of the
mortgage portfolio should be reflected under the
least desirable placement schedule from an income-
generating perspective (i.e., last day draw if the mort-
gage rate less the servicing fee exceeds the acquisition
fund rate; first month draw if vice versa).
Fees
All fees, including trustee, servicers, rebate analyst,
and any other parties paid under the financing doc-
uments, should be shown in the cash flows inamounts consistent with the financing documents.
All fees should be capped, stated as a percentage of
the mortgages or bonds outstanding, and, prefer-
ably, subordinate to debt service. Minimum trustee
fees should be no less than three basis points, with
an additional one basis point provided for the
rebate analyst fee. Any fixed fees should be ratably
reduced in the event of a prepayment under the
mortgage loan, or stress runs may be needed.
Investment earnings
In the absence of an investment agreement,
Standard & Poor’s current reinvestment rate
assumptions should be used.
Debt-repayment schedule
Cash flow runs should demonstrate that there are
sufficient assets and revenues to pay debt service
and expenses under a zero prepayment scenario. In
some instances, Standard & Poor’s will accept cash
flows modeled with some level of prepayments.
Prepayment penalties
No prepayment penalties should be assumed in
cash flows, as payment of these penalties may not
be enforceable under state law.
Rebate
All rebate fees and payments to the federal govern-
ment for rebate should be demonstrated.
Surpluses
All projections should assume the availability of
some surpluses (defined as revenues in excess of
debt service plus expenses) for prior redemption of
outstanding bonds. A minimum carry forward bal-
ance each period of at least $10,000 should be
maintained. If it is the practice of the agency to
release excess monies from the indenture at a cer-
tain asset/liability parity position or some other
point in the issue, cash flows should accurately
reflect this release. Funds provided for loss coverage
should not be counted as an asset.
Recycling
Indentures that provide for the recycling of mort-
gage prepayments and surpluses may require addi-
tional cash flow runs. Documents should specify
that new (recycled) mortgage loans are to be made
only at the same rate and existing term as the
original (prepaid) loan and such prepayment pro-
ceeds are to be held no longer than six months
before being used to redeem bonds. Recycling can
be done with terms other than the same mortgage
rate, term of the loan, or with different holding
periods of prepayment proceeds as long as the spe-
cific terms as outlined in the trust indenture and
mortgage documents are properly modeled in the
cash flows.Housing240 Standard & Poor’s Public Finance Criteria 2007Mortgage loans
rate (%) AAA AA A BBB
11.00 900 866 853 844
10.50 890 856 843 834
10.00 870 836 823 814
0 9.50 840 806 793 784
0 9.00 800 766 753 744
0 8.50 750 716 703 694
0 8.00 650 616 603 594
0 7.50 500 466 453 444
0 7.00 350 316 303 294
0 6.50 270 236 223 214
0 6.00 230 196 183 174
0 5.50 210 176 163 154
0 5.00 195 161 148 139
0 4.50 185 151 138 129
0 4.00 175 141 128 119
Table 4Prepayment Speeds (% PSA)