Program Management
Standard & Poor’s focuses on the responsibilities
and capacity of the issuer, trustee and mortgage ser-
vicer in MRB transactions. All responsibilities
should be clearly identified in the financing docu-
ments. Standard & Poor’s will conduct administra-
tive and managerial reviews upfront and ongoing to
address the capacity of issuers and servicers. The
ability to execute routine administrative functions
and make more complicated business decisions is
especially important in MRB issues. HFAs are relied
on heavily for this function.
Trustee responsibilities
The ultimate responsibility for the successful man-
agement of an issue is the bond trustee. To ensure
that the trustee function is performed adequately,
the following guidelines should be established in the
bond documents:
■The trustee may not resign until a successor
trustee is appointed;
■The trustee should hold dedicated assets in funds
and accounts designated for a particular transac-
tion, in trust, for the benefit of the bondholders.
These funds should not be commingled with any
other funds in the trust or commercial department;
■The trustee has primary responsibility for receiv-
ing payments from servicers, relevant guarantors,
and other third parties, and remitting these
receipts to the bondholders in accordance with
the terms of the indenture;■The trustee receives periodic reports with respect to
received mortgage payments and future projections
and performs the bond administration function;
■The trustee assumes the responsibilities of the
master servicer for the mortgage loans upon the
servicer’s removal or resignation;
■The trustee covenants in the indenture to provide
Standard & Poor’s, on an annual basis or as rea-
sonably requested, any information necessary to
maintain the assigned rating on the bonds unless
the housing agency has agreed to provide the
information. This includes information on the
periodic delinquency, foreclosure, and prepay-
ment experience, as well as the issue’s financial
status; and
■The trustee covenants in the indenture to
apply for the cash advance (if applicable) if
the servicer has failed to do so when appropri-
ate, and to assume servicing if the servicer is
unable to perform.
Administration of mortgage assets
To assess management capability in the administra-
tion of mortgage assets, Standard & Poor’s general-
ly examines the participating entity’s volume and
experience in the origination or servicing of mort-
gages. This capability is strengthened if all of the
lender/servicers comply with Fannie Mae/Freddie
Mac and/or FHA/VA standards.
In MRB issues with a large number of participat-
ing lender/servicers, program administration is an
especially important rating concern. Although the
trustee is ultimately responsible for the operation of
the program, for most local issuer transactions, a
master servicer, acceptable to Standard & Poor’s, is
needed. The master servicer monitors and evaluates
the performance of each lender during the origina-
tion period. Following the underwriting of a mort-
gage, the master servicer monitors and evaluates the
performance of each servicer, and recommends
replacement of servicers, if appropriate. Most HFAs
perform this function for their issues.
Administrator responsibilities
On a monthly basis, the administrator should
review each servicer’s escrow records to reconcile
escrow balances, and should monitor delinquencies
and foreclosures. The administrator also should
ensure that all claims are filed in a timely and accu-
rate manner under the various insurance policies,
including the advance claims endorsement.
Finally, the administrator should collect informa-
tion from the servicers and submit reports to the
trustee pertaining to the mortgage loans, as well as
to monies remitted to the trustee by the servicers.Housing242 Standard & Poor’s Public Finance Criteria 2007Generally, for nonparity, stand-alone bond financings where mortgages are originated
at two or more different rates, cash flows should be run reflecting the prepayment
spreads expected according to the rating level and mortgage interest rate.
Prepayments will occur for both voluntary and nonvoluntary reasons. Voluntary
reasons include sale of the home due to a job change or desire to be in a larger
home, as well as refinancing the mortgage at a lower rate of interest. Involuntary
reasons include default and foreclosure of the mortgage loan.
At any given rating level, as the rate on the mortgage loan increases, the rate of
prepayment also increases. This reflects the fact that the voluntary prepayments
are expected to rise. Holding the interest rate constant, prepayments will also
increase as the rating level increases. This reflects the higher level of delinquencies
and defaults associated with the higher rating level.
The table outlines the expected prepayment rate quoted in PSA for each rating
level and mortgage rate combination. When the mortgage rate used in a bond
financing falls between two numbers on the chart, the rate for the high rate loan
should be rounded up and the rate on the low rate loan should be rounded down.
So, if an issuer plans to offer mortgages at both 6.35% and 7.25% and it is seeking
an ‘AA’ rating, the issuer would use a prepayment speed of 466% PSA for the 7.25%
mortgage loans and 196% for the 6.35% mortgage loans.
Multiple Mortgage Rate Prepayment Runs