The trustee may purchase an MBS with monies in
the acquisition fund only after verifying the following:
■After acquisition, the sum of the outstanding bal-
ance of the securities plus all fund balances
(excluding the rebate and expense funds) equals
or exceeds the amount of bonds outstanding;
■The security bears interest at the pass-through
rate specified in the bond documents and matures
by the date specified; and
■The trustee will have a first perfected security
interest in the security after purchase.
Such verification guarantees that sufficient rev-
enues will be available to meet future debt service
and expenses and that asset coverage will be main-
tained. The process of converting single-family
whole loans into MBS continues throughout the
acquisition period. Any monies remaining in the
acquisition fund at the end of the period are used to
redeem bonds, unless the issuer seeks an extension
with prior written notification to Standard &
Poor’s Ratings Services.Cash Flows
All mortgage payments shown in the cash flows
should reflect the pass-through rate of the respec-
tive MBS, which is the mortgage loan rate net of
servicing and guarantee fees. In addition, fees to be
paid for trustee and rebate analyst services, issuer
fees or any other fees as outlined in the trust inden-
ture must be reflected. Cash flows should show that
assets under the program are at least equal to liabil-
ities until bond maturity or earlier redemption.
Revenues must be sufficient to meet all scheduled
debt service payments on a timely basis.
Cash flow runs must assume full delivery of the
MBS on the least desirable origination date permit-
ted under the bond documents. This origination date
is determined by comparing the MBS pass-through
rate to the investment rate to be received on theacquisition fund. If the pass-through rate exceeds the
acquisition fund rate, last-day origination is
assumed. If the acquisition fund rate exceeds the
pass-through rate, first-day origination is assumed.
The cash flow scenarios that should be provided
are full origination of mortgage loans with 0% pre-
payment, rapid prepayment, and non-origination of
all mortgages. The non-origination run should
assume a full redemption of bonds on the date spec-
ified in the bond documents in the event origination
of mortgages does not occur. A rapid prepayment
run is necessary for all ‘AAA’ rated single-family
bond issues, including MBS transactions. The rapid
prepayment scenario should be prepared at a pre-
payment speed sufficient to redeem all bonds within
two years after origination; however, depending on
the mortgage loan interest rate, the issuer, and
whether or not the bonds are part of a parity pro-
gram, this scenario may be run at slower prepay-
ment speeds that redeem all bonds within a longer
period of time after origination, as shown:
Depending on the structure of each transaction,
other cash flow scenarios may be needed. For a
description of some of the more common among
these as well as additional detail with regard to
cash flows, please refer to the criteria, “Single-
Family Whole Loan Programs.” The cash flow dis-
cussion in this article includes information on
treatment of variable rate debt and swaps.
The assumptions for all cash flows run should
include appropriate mortgage payment lags reflecting
the actual expected receipt date of MBS payments.
The Ginnie Mae I program guarantees payments on
the 15th day of the month; Ginnie Mae II on the
20th; Freddie Mac on the 15th, and Fannie Mae on
the 25th. The form and source of coverage for credit
shortfalls should be outlined in the indenture. These
shortfalls may be funded in a variety of ways, includ-
ing use of a bond premium, buying the MBS at a dis-
count or an issuer contribution. Any monetary
contributions must be made with funds considered
preference-proof pursuant to Sections 362(a), 547,
and 550 of the Bankruptcy Code.Legal Documents
The criteria for MBS program documents closely
coincide with the criteria for single-family whole
loan issues with key analytical focus on all trustee
responsibilities, additional bonds, eligible invest-
ments, redemptions, events of default, contributions
for credit shortfalls, and flow of funds. Proper noti-
fication should be given to Standard & Poor’s for
various events including, but not limited to, exten-
sion of the acquisition period, any change to the
bond or mortgage documents, or any change in the
trustee or investment agreement provider.Housing246 Standard & Poor’s Public Finance Criteria 2007—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