Ginnie Mae, Fannie Mae, and Freddie Mac Multifamily Securities ..................................
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tandard & Poor’s Ratings Services rates multi-
family housing transactions supported by mort-
gages guaranteed by Ginnie Mae and Government
Sponsored Enterprises (GSEs), such as Fannie Mae
and Freddie Mac. In these structures, Ginnie Mae,
Fannie Mae, or Freddie Mac issue and deliver to
the trustee an MBS in exchange for the mortgage
loan. Over the past few years, however, Fannie Mae
and Freddie Mac have typically provided their sup-
port in the form of standby and direct-pay credit
facilities rather than MBS. Ginnie Mae continues to
issue MBS in the form of permanent loan certifi-
cates (PLCs) or construction loan certificates
(CLCs) that convert to PLCs for substantial rehabil-
itation or new construction projects. Mortgage pay-
ments on the MBS, or payments from the credit
facilities, are the principal source of credit protec-
tion for the bonds and pay debt service and all pro-
gram expenses.MBS Programs
Ginnie Mae, Fannie Mae, and Freddie Mac are
obligated to make payments under the certificate or
credit facility to the trustee, regardless of whether
payments are actually made on the underlying
mortgage loans or bonds. Ginnie Mae and Fannie
Mae guarantee the timely remittance of principal
and interest on the MBS and credit facilities.
Freddie Mac only guarantees timely payment of
interest and ultimate payment of principal on MBS,
with the exception of the Freddie Mac Gold pro-
gram. Generally, Freddie Mac guarantees that prin-
cipal on the participation certificate will be received
within approximately one year of the scheduled due
dates. This one-year lag in principal must be
addressed by funding a reserve in the issue or lag-
ging all bond maturities by one year. Other alterna-
tives may be discussed on a case-by-case basis.
From a rating perspective, Freddie Mac and
Fannie Mae programs are very similar in many
respects to the Ginnie Mae programs outlined
below, and the criteria should be used when struc-
turing Freddie Mac and Fannie Mae transactions.
With regard to payment receipt dates, Freddie Mac
MBS are assumed to be received on the 20th of the
month (the 16th if book entry form) and Fannie
Mae securities on the 25th of the month. In Ginnie
Mae programs, payments are assumed to bereceived on the 20th of the month, although Ginnie
Mae pays on the 15th. Standard & Poor’s assumes
an additional five-day lag in the cash flows for
Ginnie Mae MBS, because MBS payments are not
made directly by Ginnie Mae. This is not the case
for Fannie Mae and Freddie Mac, whose payments
are made directly. There is an additional 30-day
payment receipt delay at the onset of all Freddie
Mac programs, which must be addressed. Funding
for these credit shortfalls should be clearly indicat-
ed in the indenture and in the cash flows. (Note:
Standard & Poor’s defines a lag as a delay in pay-
ment that is in addition to the normal arrearage—
the time period encompassed from the date of
origination until the first scheduled payment.)Direct-Pay Facilities
Fannie Mae and Freddie Mac provide credit and
liquidity support for fixed and floating-rate bonds.
Fannie Mae and Freddie Mac cover for preference
and stay provisions provided under the U.S.
Bankruptcy code for funds paid by non-rated
sources. These floating-rate transactions usually
have a seven-day variable rate, where bondholders
have the option to tender bonds upon seven days’
notice. The GSEs are obligated to make payments
under their respective facilities to the trustee in the
event that the mortgage payment has not been
received by a certain date. Additionally, the GSEs
are obligated to cover the purchase price of ten-
dered bonds in the event of a failed remarketing.
With this bond structure, Fannie Mae or Freddie
Mac pay the bond debt service directly as if it were
the mortgage loan, much like a direct-pay LOC.
Although not an LOC, this facility is similar to a
bond LOC transaction. In this instance, the trustee
draws monthly on the facility and uses the funds to
pay debt service on the bonds. Cash flows are
unnecessary because payments are received by the
trustee prior to debt service payment dates.
Fannie Mae has modified its direct-pay facility to
include a bifurcation of credit and liquidity expira-
tion dates so that the liquidity support provided
under the enhancement expires 10 years after the
effective date of the agreement.
This change introduces the possibility for a ten-
der option to occur without the necessary liquidity
support in place to pay the purchase price of bonds.Ginnie Mae, Fannie Mae, And
Freddie Mac Multifamily Securities
http://www.standardandpoors.com 259