provides an additional 30 days’ coverage during the
FHA’s grace period. Although the loan is in default
once the payment is missed, the FHA requires a 30-
day grace period before a claim can be filed. These
reserve levels assume that the agencies file a claim
at the latest date permissible under the HUD regu-
lations (unless an extension is granted), which is 75
days after default.
Additional reserves that may be called for would
be for reinvestment of insurance proceeds during
the call notice period under the bond documents.
Also, for bond issues where the DSRF is funded
with bond proceeds, if the reserve is called on, the
expended portion is no longer earning expected
investment income. Depending on when the draw-
down occurs, Standard & Poor’s has found that a
shortfall may be created. The shortfall may be off-
set by the interest component of the FHA insurance
proceeds. However, since the interest component is
based on the mortgage rate under the risk-share
program and not the FHA debenture rate,
Standard & Poor’s has found this shortfall more
common than under the regular FHA insurance
programs. Sufficient funds need to be available to
pay bondholders in full assuming that the entire
reserve fund is hit. The shortfall can be covered by
funding at bond closing or by review of a full set of
cash flow runs depicting a mortgage note default at
specified dates. Two base cases should be run. Both
cases should default the issue immediately after
final endorsement. However, the first case should
show receipt of the HUD payment two weeks after
the default. The second should show HUD’s pay-
ment six months after the default. The weaker base
case should be expanded by simulating a default on
the first of each month for a one-year period.
Additional default runs may be requested for the
worst possible time in the life of the bonds, usually
indicated by low or declining parity. Such default
simulations should show the ability to redeem all
bonds in full, assuming bond redemption 30 days
after receipt of benefits.
Under the program, HUD permits extensions of
up to 180 days from default upon request.
Additional extensions are possible in situations
where the HFA certifies that a bond refunding or
mortgage refinancing is in the works, as well as a
change in ownership that will result in a mortgage
cure. The simplified claims payment procedures
clearly allow agencies more flexibility in pursuing
these options while keeping bonds current.However, Standard & Poor’s cannot anticipate that
a six-month reserve will always be sufficient in
these cases. Therefore, agencies desiring more flexi-
bility in filing claims should include conditions to
filing extensions in the bond documents. Suggested
conditions should include:
■Determination of the latest date for filing the
claim;
■Verification that reserves or additional deposits
are sufficient to pay bonds, assuming that pay-
ment from the FHA is received 180 days after the
date of default plus the number of days in the
extension period; and
■Receipt of the FHA approval in writing.
Assignment process
The assignment process is as follows:
■Notice of default status on multifamily projects
must be filed within 10 calendar days after date
of default;
■Above form must be submitted monthly until
application for initial claim has been filed or
HUD waives requirement;
■Application for initial claim payment and pay-
ment information form must be submitted within
75 calendar days of the date of default;
■Standard & Poor’s should be copied on all forms
submitted to and received from HUD;
■Before accepting partial payment of claim, major-
ity bondholder approval should be received and
notice sent to Standard & Poor’s;
■Provision for claim payment to be used to redeem
bonds within 30 calendar days of receipt, with
wire transfer of excess funds to HUD 30 days
thereafter; and
■The HFA debenture must be issued within 30
days of initial claim payment, or such other date
as approved by HUD.
Cash flows
Standard no default cash funds should be provided
consistent with the fully insured FHA program. In
addition, a default scenario should be provided
demonstrating that bonds can be redeemed in full
should a mortgage loan default occur on the first
payment date, assuming a six-month period to
receive insurance proceeds, investing funds for
redemption during the notice period, and redeeming
bonds on the date set forth in the bond documents.■Housing258 Standard & Poor’s Public Finance Criteria 2007