■The trustee submits documentation as described
in the procedure outlined above.
■If 30 days prior to any interest payment date on
the bonds the trustee determines that sufficient
money will not be available to make the pay-
ment, it notifies HUD and requests immediate
payment of mortgage insurance benefits in cash.
■If at any time during the extension period the
trustee determines that a workout is infeasible, it
immediately requests HUD to make such a deter-
mination and submits notification of intention
and election to assign the mortgage to the HUD
central office.
■In no event does the trustee consent to any work-
out agreement or any adjustment or revision of
the mortgage insurance contract without prior
written confirmation of the rating from
Standard & Poor’s.
■The trustee does not request an extension of the
initial period unless the trustee receives written
confirmation of the rating from Standard &
Poor’s. If the conditions for further extension are
not met, the trustee immediately submits notifica-
tion of intention and election to assign the mort-
gage to the HUD central office. If the above steps
are followed, the trustee should be in a position
to record the assignment of the note.
The financing documents should be clear that
full processing be pursued in all workout situa-
tions. Another example of a workout is pursuant
to Section 207.258(b) of the HUD Regulations,
under which mortgagees have the option of
accepting a partial claim payment in lieu of
assignment. Under this program, the FHA recasts
the mortgage into two loans: a first mortgage loan
insured by the FHA, and a second uninsured
mortgage loan held by the FHA. The FHA area
office determines the amount of the first mortgage
loan, based on the debt service that the project’s
estimated net operating income can support. The
second mortgage, negotiated between the project
owner and the FHA, is the difference between the
outstanding balance of the original mortgage loan
and the recast first mortgage loan. HUD regula-
tions allow that pursuing the partial claim option
will not prejudice the mortgagee’s right to file for
full insurance benefits and allow extension of the
time to file for full insurance.
Procedures for processing of claims for projects
subject to the 87-9 letter should be followed, with
one exception. Extensions to file a claim not
exceeding three months (or such shorter period
required by the FHA) should be requested only on
the trustee’s decision to pursue a partial claim pay-
ment or other workout option. FHA regulationsallow for a mortgage note cure to take place up
until the date of assignment. To ensure that bond
cash flow is not jeopardized, the indenture should
contain language providing for full payment of all
delinquent accounts and lost investment earnings,
and verifying the ongoing financial feasibility of the
bond issue.
Following commencement of the assignment
process, the trustee should draw on the reserves on
the next bond debt service payment date in an
amount sufficient, together with mortgage revenues
received prior to the default, to pay debt service
due on that date. Funds covering the 1% assign-
ment fee should be used to redeem bonds no later
than on assignment. Documents should clearly state
that a mortgage default should in no event trigger a
default on the bonds.
Standard & Poor’s assumes that, within 12
months of the default, the trustee will receive: mort-
gage insurance benefits equal to 99% of the princi-
pal balance of the mortgage note as of the date of
default, and accrued interest on the mortgage prin-
cipal from the date of default to the date of pay-
ment at the applicable FHA debenture rate. As
described above, the FHA may pay mortgage insur-
ance proceeds in two installments.
Immediately after receiving payment from the
FHA, the trustee uses the mortgage insurance pro-
ceeds to redeem bonds. The trustee must carry out
the redemption at the earliest practicable date
allowed by the “Notice of Redemption” section of
the indenture. Once in receipt of full mortgage
insurance benefits, the trustee uses these funds plus
those remaining in the DSRF to redeem bonds.
Trustee and servicer
To help ensure that FHA procedures are pursued
diligently, the indenture and servicing agreement
should require the trustee and the servicer to be
FHA-approved mortgagees. Such status should be
maintained throughout the life of the issue. In addi-
tion, the indenture should state that the trustee can-
not resign without the appointment of a qualified
successor trustee, and that the trustee will assume
servicing responsibilities temporarily if the servicer
is removed, resigns, or is unable to perform his
duties as servicer. Standard & Poor’s should be
notified in the event that a successor trustee or ser-
vicer is appointed. The trustee or issuer should use
its best efforts to put a successor servicer in place as
soon as possible.
Standard & Poor’s recommends that the servicer
and the trustee be unaffiliated so that there is no
problem in allocating responsibility.
The servicing agreement should state that the ser-
vicer would forward the mortgage revenues to the
trustee immediately, but no later than three businessHousing254 Standard & Poor’s Public Finance Criteria 2007