a fast-draw scenario would be requested. In a fast
draw, the mortgage would be funded in its entirety
at bond closing. According to this formula, the cash
flows will show the least amount of interest earn-
ings or revenues that could be expected before the
mortgage note is finally endorsed.Debenture Pay Programs
Standard & Poor’s criteria for debenture pay pro-
grams differ from the cash program in three ways.
First, unlike cash pay programs, debentures are
delivered at one time instead of in two installments.
Debentures cannot be expected to be received
before 14 months after default. Therefore, reserves
should be sufficient to cover this time period.
Second, in addition to the base case run,
Standard & Poor’s reviews a full set of cash flow
runs depicting a mortgage note default at specified
dates. The default projections requested are a func-
tion of the bond structure. Ideally, for any struc-
ture, Standard & Poor’s would like to receive one
set of cash flows that demonstrate the default
occurring at the worst possible time in the life of
the bonds. If this is not possible, the following con-
ditions should be met. If the issue consists of one
term bond with anticipatory sinking funds, two
default scenarios should be submitted. One assumes
a default at the commencement of note amortiza-
tion, and the other a default 19 years prior to final
maturity of the bonds. The second scenario pro-
vides for the bonds to be paid off without the bene-
fit of the maturing debentures. If the issue consists
of multiple-term bonds, serials, or one-term bond
with mandatory sinking funds, cash flow projec-
tions should assume a mortgage note default on
every bond payment date.
Finally, the FHA pays interest on its debentures
only on January 1 and July 1 of each year.
Therefore, in a debenture payout issue, the bondpayment dates should be scheduled to correspond
with the FHA’s payment dates. In addition, cash
flows should assume receipt of debentures 14
months after the first mortgage payment was due
with interest at the debenture rate paid through the
January or July prior to the date the debentures are
issued. Subsequent to the first payment, six months
of debenture interest can be shown on January 1
and July 1 of each year.
In some circumstances, HUD may indicate in
writing that claims will be paid in cash, as opposed
to debentures, or a combination of cash and deben-
tures. As long as the legal structure of the transac-
tion supports a cash payout, Standard & Poor’s will
assume the same. If the possibility exists that pay-
ment could still be made in debentures for any rea-
son, reserves should be sufficient to cover a
debenture payment scenario, and cash flows should
reflect sufficiency for both payout options.
Debenture lock
Issuers of tax-exempt debt who financed
FHA-insured hospitals and housing projects in a
high interest-rate environment have used the deben-
ture lock mechanism. Because of tax restrictions,
issuers were prohibited from issuing bonds to cover
costs of issuance for the refunding bonds, resulting
in nonasset bonds.
Coverage of non-asset bonds was ensured as a
result of a written agreement entered into prior to
bond closing, under which the FHA agrees to pay
claims in 20-year noncallable debentures. In some
situations, the debenture lock is only in effect for
defaults occurring prior to the date parity is
attained, after which time, claim payment reverts to
cash pay. In a default situation, the debenture’s
interest rate, which was set when yields were high,
should be high enough to cover the significantly
lower interest rate on the bonds.HFA Risk Sharing Program
The HFA Risk Sharing Program differs from full
insurance programs in several key areas that affect
the amount and timing of claims payment, as well
as the claims process. The rating criteria differs in
the following key areas:
Reserves
Based on FHA regulations and factoring in delays
and permitted extensions, Standard & Poor’s has
concluded that 180 days’ coverage provided by a
debt service reserve fund (DSRF) will be sufficient
for strong issuers to provide an appropriate cushion
for ‘AAA’ rated debt. In addition, cash flows should
be run with a 30-day lag in receipt of mortgage
payments. The lag provides the liquidity needed to
cover for late payments without triggering a tap on
reserve funds. In a default situation, the lag alsoFHA Insured Multifamily Mortgageshttp://www.standardandpoors.com 257The HUD risk-sharing program enables state and local housing finance agencies
(HFAs) to act on behalf of the FHA in issuing mortgage insurance commitments on
multifamily housing loans. Agencies share risk with the FHA in return for delegated,
as well as customized, underwriting. Although the risk-sharing program requires
reimbursement from participating agencies, the program is a full insurance program,
mandating full payment by the FHA before reimbursement.
HUD designed the risk-sharing program to enhance timeliness of claims payment
by eliminating the FHA’s traditional claims-paying delays and simplifying the
process. Paperwork requirements have been reduced, and financial audits are car-
ried out after the initial claim has been paid. The risk-sharing program allows for
claims to be paid in an amount equal to 100% of the mortgage note, with interest
paid at the mortgage note rate. The FHA mandates that this payment be used to
retire bonds within 30 days of receipt. The full accounting process and determina-
tion of the final claim payment, which determines the amounts the agency and the
FHA ultimately will pay, take place after bondholders have been paid in full.
HFA Risk Sharing