PubFinCriteria_2006_part1_final1.qxp

Mortgage servicer responsibilities

In the typical MRB structure, mortgage servicers

are required only to remit mortgage revenues to the

extent that they are collected. If a mortgagor’s pay-

ment remains delinquent, the servicer is required to

undertake further steps to collect. The servicer also

must apply for advance claims payments under the

appropriate insurance policy or proceed toward

foreclosure if applicable.

Standard & Poor’s reviews the track record of

each servicer as it pertains to originations, delin-

quencies, foreclosures, insurance claims processing,

and claims denials upon the rating of a new resolu-

tion. Generally major servicers have sound proce-

dures to track loans and process claims. Servicers

with negative track records in one or more of these

areas may be requested not to participate in the

program, although this is uncommon.

FDIC regulations concerning the payment of

insurance benefits limit the $100,000 FDIC benefit

on a mortgage servicing account to $100,000 per

investor, rather than $100,000 per account. This

has an impact on all single-family, whole-loan

deals. If an investor has an interest in one or more

servicing accounts or has another account at the

servicing institution, then all of these accounts

would be aggregated in calculating the insurance

benefit for that investor. Standard & Poor’s cannot

be assured that immediate remittance to the trustee

of amounts in excess of $100,000 will still leave the

servicing account whole in the event of a servicer

failure. This concern needs to be addressed by the

issuer on all single-family, whole-loan financings.

Cash flow administration

Operation of an MRB issue’s cash flow depends on

adequate cash flow administration. This function

includes executing investment transactions and

investment agreements, managing cash to maximize

interest income, and identifying prepayments and

appropriate bonds to be called from prepayments.

This function should be carried out by the agency

or capable third party overseen by the issuer.■

Single-Family Second Mortgage Loans ............................................................................

http://www.standardandpoors.com 243

B

onds secured by second mortgage loans origi-

nated to low-and moderate-income persons are

eligible to receive ratings as high as ‘AAA’, depend-

ing on the credit supports and levels of over-collat-

eralization used to back the bonds. Rated second

mortgage bonds typically would be used for down

payment assistance and closing costs as opposed to

cash out mortgages for consumer purposes. Bonds

backed by second mortgages need higher loan loss

coverage than first mortgages because of the higher

probability of foreclosure and the lack of recover-

able assets in the event of foreclosure. For example,

loan loss coverage for second mortgage bonds rated

at the ‘A’ rating level would start at 25% and could

climb beyond 48%, depending on characteristics of

the loans and other factors.

Standard & Poor’s Ratings Services will apply the

same standards when determining loan loss cover-

age for second mortgages whether rating programs

supported by only second mortgages or programs

with first and second mortgage collateral. The eval-

uation is derived from Standard & Poor’s first

mortgage criteria and includes:

■Credit characteristics of the mortgage loan pool;

■Reserve funding;

■Bond and legal structure; and

■Cash flow sufficiency.

Credit Characteristics

The higher credit coverage for second loan bonds

results from key elements that increase the risk of fore-

closure of second mortgages, including the following:

The subordinate nature of

the second mortgage pledge

Second mortgage lenders have a subordinate lien on

the assets pledged for repayment of the first and

second mortgages. Default on the second mortgage

does not affect payment of the first mortgage,

whereas default or foreclosure on the first mortgage

results in the same on the second mortgage. In the

event of foreclosure, the order of priority requires

that any proceeds generated from a sale go first to

the first mortgage lender. This could leave the hold-

er of the second mortgage with no funds for recov-

ery, resulting in a loss severity of 100%.

Furthermore, payment interruption on the first

mortgage must be remedied before payment can go

toward the second mortgage.

Single-Family Second Mortgage Loans