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Criteria | Governments | Request for Comment: U.S. Federally Enhanced Housing Bonds Rating Methodology


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Criteria | Governments | Request for Comment: U.S. Federally Enhanced Housing Bonds Rating Methodology


1. S&P Global Ratings is requesting comments on the proposed update to its methodology for rating U.S. federally enhanced housing bonds (FEH bonds). All terms followed by an asterisk are defined in the glossary (see Appendix A).

2. The proposed methodology, if adopted, would apply to housing bonds where full credit enhancement from U.S. federal government agencies, as outlined below, is available on the mortgage loans, mortgage-backed securities (MBS) or directly on the FEH bonds.

3. The proposed methodology largely focuses on simplifying and clarifying the existing methodology pertaining to FEH bonds. We propose to maintain the majority of our current rating approach but consolidate existing criteria, focus on key rating fundamentals, clarify the application of adjustments and caps, change the cash flow minimum threshold from a dollar amount to an asset-to-liability percentage, and introduce a holistic analysis. We intend this proposed methodology to be read in conjunction with the related guidance (see Proposed Guidance in Appendix B). Upon publication of the final criteria, the following four criteria will be superseded:

  • "Single-Family Mortgage-Backed Securities Programs," published June 13, 2007
  • "FHA Insured Mortgages," published June 18, 2007
  • "Ginnie Mae, Fannie Mae, And Freddie Mac Multifamily Securities," published June 26, 2007
  • "Methodology For Certain Housing Bond Transactions Supported By U.S. Government Agencies And Government-Sponsored Entities," published Dec. 17, 2014.

4. The ratings in scope typically would include:

  • Bonds backed by single-family or multifamily loans (mortgage loans) or MBS, where the mortgage loans or MBS benefit from full credit enhancement via a guarantee, insurance, or credit enhancement instrument (CEI) from U.S. federal agencies such as the Federal Housing Administration (FHA*) or the Government National Mortgage Association (Ginnie Mae)--both defined as government entities*(GEs)--or from one or more U.S. government-sponsored enterprises* (GSEs) such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).
  • Bonds whose debt repayment is directly enhanced by a GE/GSE (through a direct-pay or standby CEI).
  • Hybrid programs composed of a mix of mortgage loans or MBS supported by the GE/GSE(s) and whole loans*, as long as the federally enhanced mortgage loans or MBS represent a predominant share of the program.

5. For housing bonds backed predominantly by single-family or multifamily whole loans, we apply different criteria, "Single-Family Whole Loan Programs," published June 14, 2007, and "Rating Methodology And Assumptions For Affordable Multifamily Housing Bonds," published June 19, 2014, respectively.

6. FEH bonds are issued as either stand-alone transactions or multiple transactions issued under a parity resolution*.

7. To be rated under the proposed methodology, issues must meet two conditions:

  • The eligibility conditions for key transaction participants (KTPs*) specified under the criteria "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published Oct. 9, 2014, herein referred to as the "Operational Risk Criteria."
  • Transaction documents* must clearly lay out the program parameters and legal framework consistent with these proposed criteria and the program(s) of the GE/GSE(s).


8. We currently maintain approximately 800 ratings that fall within the scope of this Request For Comment. Assuming that the entities maintain their credit characteristics, testing suggests that less than 2% of the ratings may be affected. Specifically, we expect downgrades typically ranging from one to two notches.


9. S&P Global Ratings is seeking responses to the following questions, in addition to any other general comments on the proposed methodology:

  • What is your view of the proposed changes and the clarification of various concepts, as well as of the overall structure of the proposed methodology, including the level of the proposed caps?
  • Do you believe that the proposed methodology appropriately captures credit risks and do you agree with the manner in which we propose to assess these risks? If not, what alternative(s) would you propose?
  • In your opinion, does the proposed methodology contain any significant redundancies or omissions?
  • Is the proposed methodology clear, and if not, why?
  • Are there any other views regarding this methodology proposal that you would like to bring to our attention?


10. We encourage interested market participants to submit their written comments on the proposed criteria by Oct. 4, 2019, to where participants must choose from the list of available Requests for Comment links to launch the upload process (you may need to log in or register first). We will review and take such comments into consideration before publishing our definitive methodology once the comment period is over. S&P Global Ratings, in concurrence with regulatory standards, will receive and post comments made during the comment period to Comments may also be sent to, should participants encounter technical difficulties. All comments must be published, but those providing comments may choose whether to have their remarks published anonymously or they may identify themselves. Generally, we publish comments in their entirety, except when the full text, in our view, would be unsuitable for reasons of tone or substance.


11. In general, we determine the rating on an FEH bond according to the factors depicted in chart 1. Depending on the transaction, not all factors may apply. For example, for a direct-pay CEI transaction where the enhancement is provided on the bonds directly, we would not apply a cash flow analysis nor apply other criteria, as the rating is equal to the GE/GSE rating.

GE/GSE rating

12. The key characteristic of FEH bonds is generally the full enhancement by the GE/GSE. The enhancement is either directly to the bonds (through the enhancement on debt service payment), or indirectly through the mortgage loans or MBS which are backing the bonds and which receive the enhancement. The GE/GSE enhancement programs are analyzed differently as compared with the approach we take under our "Guarantee Criteria," published Oct 21, 2016. The unique approach to analyzing GE/GSE enhancement in these criteria takes into account the missions and public purpose nature of the GE/GSE(s), irrevocable guarantee or insurance, long history of the GE/GSE's willingness to fulfill its obligations, as well as the requirements of the legal and operational risk framework, as outlined below. If the analysis supports full enhancement by the GE/GSE, we pass through the GE/GSE creditworthiness to our assessment of the creditworthiness of the underlying assets. Where satisfied, the proposed methodology is guided by a framework that uses the rating (that is, the issuer credit rating or implied rating) on the GE/GSE as the starting point of the analysis (subject to meeting the legal and operational risk framework).

13. In the case of direct-pay CEI transactions, the final issue rating would be equal to the GE/GSE rating. The final rating on the transactions with mortgage loans or MBS enhancement may differ from the GE/GSE rating due to exposure to additional risk (such as cash flow shortfalls leading to declines in asset-to-liability parity*, counterparty risk, etc.) or may be eligible for a higher rating under the application of our "U.S. Government Support In Structured Finance And Public Finance Ratings," published Dec. 7, 2014 ("U.S. Government Support criteria").

14. Given the role of the GE/GSE in such transactions, any change in creditworthiness of the GE/GSE would likely affect the bond ratings in scope of these proposed criteria, unless constrained by applicable caps or subject to U.S. Government Support criteria.

Chart 1

Legal framework and operational risk framework requirements

15. The legal framework is important to the transactions in scope, because it links the duties of the KTPs with the proper execution of the program.

16. Table 1 outlines the typical legal provisions we expect to be covered in transaction documents, as well as examples of typical elements of such provisions. Our legal analysis similarly focuses on bankruptcy and other legal risks that could adversely affect the ability to pay full and timely debt service. These concepts are analyzed differently, as compared with the approach we take in our analysis of U.S. structured finance transactions because of the unique nature of U.S. public finance housing transactions (e.g., more flexible, diverse, and dynamic structures that are often actively managed and affiliated with a U.S. municipal or quasi-municipal entity and hence, there may not be formal separateness covenants or requirements for independent directors).

17. If, in our view, the typical legal provisions are not present in the transaction documents or the associated legal risks are not mitigated, the transaction would not be eligible for ratings under these proposed criteria. Where we deem appropriate to analyze whether these legal risks are mitigated, we may request legal opinions that address one or more issues such as: automatic stay risk, preference risk, trust estate parameters, Chapter 9 status, non-consolidation, perfected security interest, enforceability of the transaction documents, or other applicable risks.

18. In addition, to be rated under the proposed methodology, issues must meet the eligibility conditions for KTPs specified under the Operational Risk criteria.

Table 1

Typical Legal Provisions And Examples
Legal Provision Example
Security and collateral Assets and revenues of the trust, as defined, should be pledged to bondholders and held in a separate segregated trust fund for the benefit of the bondholders
Security details such as type, purchase price, source of funds for purchase, interest rate
Mortgages must be consistent with the applicable tax code and GE/GSE guidelines
Process of converting loans to MBS must comply with GE/GSE guidelines
Indenture provisions conform with enhancement agreement
Bankruptcy, preference and automatic stay risk Our legal and regulatory risk analysis focuses on bankruptcy and other legal risks that could adversely affect the ability to pay full and timely debt service. We typically require that the trust securing the debt service payments is a bankruptcy-remote entity.
Eligible investments Clearly defined provisions that comply with our ”Global Investment Criteria For Temporary Investments In Transaction Accounts," May 31, 2012
Flow of funds Clearly established accounts and priority of payments from such accounts
Priority given to payment of bond debt service (principal and interest) above all other payments
Directives for payment of fees, expenses, or premiums after debt service
Directives for prepayments from voluntary or involuntary events
Timing and directives for redemptions
Additional bonds Typically, stand-alone transactions do not allow for the issuance of additional bonds
Any issuance of additional bonds would require rating confirmation by S&P Global Ratings
Redemptions Timing and verification of, as well as directives for, bond redemptions
Provision that prepayments and repayments of any amount in excess of regularly scheduled principal and interest are used to redeem bonds
Provision that unexpended bond proceeds will be used to redeem bonds, pay purchase price, or be transferred in connection with a mandatory tender and remarketing of certain bonds, after the initial acquisition or construction period
Events of default Definition of events of default and remedies
Timing and directives for events of default
Conditions required to accelerate due to payment default
Acceleration for non-payment default must have 100% bondholder approval, unless there are mitigants, such as sufficient funds to fully repay bondholders and fulfill payment of required fees on the acceleration payment date
Reserves, if applicable Size, purpose, and directives for reserves
Initial funding level and required maintenance level
Remedies for noncompliance with reserve requirements
Trustee responsibilities Duties and responsibilities of the trustee should be detailed
The balance of securities exceeds bonds outstanding prior to any release of funds
Resignation or removal cannot take place before a successor is in place
Timing of and notification to S&P Global Ratings of key events and disclosures in order to maintain the rating
Other, if applicable Directives and authorization of deposits from outside funds, subject to review of bankruptcy and preference implications
Timing of and notification to S&P Global Ratings of amendments to transaction documents, KTPs, or other provisions
Evaluation of the enhancement type

19. Our evaluation of the enhancement identifies the type of enhancement. This could take the form of a (i) GE/GSE guarantee or insurance on a mortgage loan or a guarantee on an MBS, (ii) a guarantee on the mortgage loans or bonds in the form of a GE/GSE standby CEI, or (iii) a guarantee on the bonds in the form of a GE/GSE direct-pay CEI.

GE/GSE guarantee or insurance

20. In an FEH bond transaction with a guaranteed mortgage loan or MBS, the GE/GSE(s) make mortgage loan or MBS payments to the trustee. In an FEH bond transaction with an insured mortgage loan, the GE is obligated to make payments to the trustee in the event of a default on the mortgage loan. In both types of transactions, the timing of the mortgage loan payments or MBS payments (including any recovery payments) may differ from timing of the FEH bond payments. Therefore, our analysis includes evaluation of the transaction's cash flows and the transaction's exposure to reinvestment, counterparty, and operational risk. The caps detailed in table 3 and other adjustments apply to this structure, when relevant.

Standby CEIs

21. In a standby CEI transaction, the GE/GSE is obligated to make payments to the trustee in the amount of any delinquent mortgage loan payment or payment on the FEH bonds. Similar to a transaction backed by a GE/GSE guarantee or insurance, there may be a difference in the timing of the remittance of the mortgage loan payment and the payment on the bonds. Therefore, our analysis includes evaluation of the transaction cash flows and the transaction's exposure to reinvestment, counterparty, and operational risk. The caps detailed in table 3 and other adjustments apply to this structure, when relevant.

Direct-pay CEIs

22. In a direct-pay CEI transaction, the trustee draws on the GE/GSE CEI in advance of each bond payment and uses the funds to pay debt service on the bonds. Loan payments received from the borrower will be used to reimburse the GE/GSE for the trustee draws. The direct-pay CEI may also provide coverage for preference and stay provisions or there may be other mitigating factors, such as additional funds made available to cover outstanding bonds. In addition, under these facilities, the GE/GSEs are typically obligated to cover the purchase price of tendered bonds in the event of a failed remarketing.

23. Our analysis of direct-pay CEIs would consist primarily of reviewing legal provisions in the transaction documents and sufficiency of the enhancement's coverage of principal and interest on the FEH bonds. We would expect that the transaction documents will require that the request and the timing of receipt of funds from the GSE will occur prior to the debt service payment dates, as well as cover certain risks such as, but not limited to: expiration or substitution, non-reinstatement of interest coverage upon an event of default, interest rate mode conversion (see Appendix B for more detail). Cash flow analysis is not required, because payments are received by the trustee prior to debt service payment dates. In addition, because the payment of the outstanding bonds is presumed to be fully covered in the event of any payment shortfall, no caps or other adjustments (including holistic analysis) apply to this structure.

Application of other criteria and caps

24. Depending on the enhancement type, we apply other criteria and caps to adjust the ratings, when relevant, as follows (see Table 2):

  • Reinvestment risk*, through the application of the criteria "Methodology And Assumptions For Stressed Reinvestment Rates For Fixed-Rate U.S. Debt Obligations," Dec. 22, 2016 ("Stressed Reinvestment Rate Criteria")
  • Counterparty risk, through the application of the criteria "Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019 ("Counterparty Criteria")
  • Operational risk (KTP) through the application of Operational Risk criteria
  • For parity resolutions only, the application of U.S. Government support criteria
  • Rating caps when asset-to-liability parity falls below 100%.

25. Once asset-to-liability parity falls below 100%, we believe an FEH bond should no longer be investment-grade, and rating caps would apply. The rating's position within non-investment-grade category depends on the transaction structure and on the timing of when debt service coverage (DSC)* falls below 1.0x.

Table 2

Applicable Caps
Enhancement type Stressed Reinvestment Rate Criteria Counterparty Criteria Operational Risk Criteria U.S. Government Support Criteria Caps (A/L parity below 100%)
GE/GSE guarantee or insurance Yes* Yes Yes Yes§ Yes†
GE/GSE standby credit enhancement instrument Yes Yes Yes Yes§ Yes
GE/GSE direct-pay credit enhancement instrument No No No No No
*Unless a pass-through transaction or there is an eligible GIC that extends through bond maturity. §Parity resolutions only. †For pass-through transactions, we would likely apply the 'CCC/CC' criteria.

26.a) Reinvestment risk.  We would apply the stressed reinvestment assumptions from table 1 of "Methodology And Assumptions For Stressed Reinvestment Rates For Fixed-Rate U.S. Debt Obligations," published Dec. 22, 2016 ("stressed reinvestment assumptions") to project income generated from reinvesting periodic cash flows within transaction accounts, when:

  • There is no guaranteed investment contract* (GIC*) provider; or
  • The GIC provider no longer meets the requirements of the Counterparty Criteria; or
  • The GIC does not extend through the bond maturity; or
  • A transaction's asset-to-liability parity approaches 100.25% (in the case where the transaction has no GIC support).

27. In analyzing reinvestment risk, we propose to introduce a 100.25% asset-to-liability parity threshold to better manage rating transitions between the investment-grade category and non-investment-grade category, which is associated with an asset-to-liability parity below 100%. This threshold would replace the existing cash flow carry forward amount of $10,000.

28. When a transaction's asset-to-liability parity approaches 100.25%, we would apply the Stressed Reinvestment Rate criteria, which could result in a lower rating unless mitigated by offsetting factors that include:

  • Providing a letter of credit (LOC) or another ratable CEI; and
  • Cash deposit or excess net assets in the trust that are not subject to clawback or other bankruptcy provisions.

29. Since this adjustment addresses the reinvestment risk*, it is not applicable to pass-through transactions* or FEH bonds that rely on an eligible GIC provider.

30.b) Counterparty risk.  For transactions that rely directly on funds provided by a counterparty to pay debt service (for example, through a GIC, sized to bond maturity, or exposure to swaps or derivative instruments), we would apply the Counterparty criteria.

31.c) Operational risk.  For any FEH transaction exposed to operational risk, we would apply the Operational Risk Criteria.

32.d) Application of U.S. Government Support criteria.  A parity resolution transaction may be eligible to be rated higher than the ratings on the GE/GSE if it meets the following conditions:

  • It passes the stress tests described in the U.S. Government Support criteria and "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published Jan. 30, 2019; and
  • Application of the Stressed Reinvestment Rate criteria.
Cash flow scenarios and assumptions

33. Asset-to-liability parity is an important indicator of the transaction performance. To determine asset-to-liability parity, we review cash flow scenarios to verify that program assets are sufficient to cover liabilities and able to withstand stress scenarios.

34. Accumulated cash flow shortfalls could result in declines to asset-to-liability parity if there are no offsetting factors present. Cash flow shortfalls typically arise from a lag in mortgage loan payment, timing mismatch between mortgage loan payments and bond payments, negative arbitrage*, and reinvestment risk. Thus, we would look to assumptions in the cash flow scenarios to address these issues. The scenarios we would typically apply to FEH bonds are:

  • Base-case scenario: Full origination of loans/0% PSA* prepayment experience,
  • Non-origination scenario: Non-origination of any loans assuming a full redemption of bonds on the date specified in the bond documents,
  • Standard prepayment scenarios,
  • 100% prepayment scenario: Full origination of loans/100% PSA prepayment experience,
  • Three-year average life scenario: Full origination of loans/three-year average life of the mortgage loans prepayment experience,
  • Rapid prepayment scenario: For transactions rated above the GE/GSE rating, full origination of loans and prepayment speed sufficient to retire 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 resolution, this scenario may be run at slower prepayment speeds that retire all bonds within a greater number of years after origination (see table 2 in "Cash Flow Scenarios And Assumptions For U.S. Public Finance Housing Bonds," published Sept. 4, 2019 ["USPF Housing Cash Flow Guidance"]), and
  • Worst-case scenario: For multifamily loans, cash flows should show default or prepayment occurring at the worst possible time in the life of the bonds (see USPF Housing Cash Flow Guidance).

35. Depending on the structure of each transaction, additional cash flow scenarios may be needed. Such scenarios are detailed in the USPF Housing Cash Flow Guidance).

36. Cash flow scenarios should demonstrate the specific assumptions as follows, further detailed in the USPF Housing Cash Flow Guidance.

  • Payment lag*,
  • Acquisition period,
  • Fees and expenses,
  • Reinvestment earnings,
  • Redemption,
  • Prepayment penalties,
  • Surpluses,
  • Recycling*, and
  • FHA insured programs.

37. For variable-rate debt transactions with unhedged interest rate exposure, we would assume stressed interest rates as per our criteria (see "U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter," published April 30, 2012 and "Request For Comment: Methodology To Derive Stressed Interest Rates In Structured Finance," April 16, 2019). For transactions with hedges (such as swaps, caps, or other derivative instruments), we would assess the counterparty risk exposure to the hedge provider under our Counterparty criteria and the eligibility of the hedge agreement under our "Global Derivative Agreement Criteria," published June 24, 2013. Additional information regarding assumptions for variable-rate bonds and related structures may be found in the USPF Housing Cash Flow Guidance.


38. Ratings would be capped when the asset-to-liability parity is below 100% or projected to fall below 100% based on the application of 'BBB' rating level stressed reinvestment rate assumptions, unless offsetting factors are present. Our analysis of the exact rating level would take into account the timing of an insufficiency in DSC (that is below 1.0x) using speculative-grade S&P Global Ratings stressed reinvestment rates and absent any offsetting factors. This cap would also apply in GIC dependent transactions (see Table 3 for more details).

39. Offsetting factors would include:

  • Providing an LOC or another ratable CEI; or
  • Cash deposit or excess net assets in the trust that are not subject to clawback or other bankruptcy provisions.

40. The rating caps outlined in table 3 are absolute, meaning that no other adjustment can lead to a rating higher than a cap, although the rating could be lower than the applicable cap.

Table 3

Application Of Caps
Final rating outcome
Projected asset-to-liability parity below 100% based on application of 'BBB' rating level Stressed Reinvestment Assumptions*. Using speculative-grade rating level S&P Stressed Reinvestment Assumptions*, and projected debt service coverage (DSC) falls below 1.0x in more than 10 years, with no offsetting factors Capped at ‘BB+’
Projected asset-to-liability parity below 100% under application of 'BBB' rating level Stressed Reinvestment Assumptions*. Using speculative-grade rating level S&P Stressed Reinvestment Assumptions*, and projected DSC falls below 1.0x between four and 10 years, with no offsetting factors Capped at ‘B+’
Projected asset-to-liability parity below 100% under application of 'BBB' rating level Stressed Reinvestment Assumptions*. Using speculative-grade rating level S&P Stressed Reinvestment Assumptions*, and projected DSC falls below 1.0x in less than four years, with no offsetting factors Capped at 'B-' (and potential application of the 'CCC/CC' criteria§)
*Methodology And Assumptions For Stressed Reinvestment Rates For Fixed-Rate U.S. Debt Obligations, Dec 22, 2016. §Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012.

41. For pass-through transactions, however, the asset-to-liability parity below 100% would generally mean rating below 'B-' because of the limited financial flexibility and lack of potential for additional revenues of these transactions.

Holistic analysis

42. To capture a broader view of creditworthiness, we would also perform our holistic analysis, as part of determining the final rating. The holistic analysis may be based on factors including our forward-looking view of an issue's financial performance, may reflect a comparable ratings analysis when relevant, or may reflect strengths or weaknesses that are not fully reflected through the application of the methodology. This analysis can result in the raising or lowering of the rating by one notch, or no change, subject to the following conditions.

43. Holistic analysis cannot result in a final rating above any rating cap and cannot override rating outcomes based on the applicable criteria unless such flexibility is allowed in those criteria. In addition, the holistic analysis alone cannot result in a rating on a transaction above the rating on the GE/GSE.


44.Asset-to-liability parity.   The ratio of total assets to total liabilities, where total assets typically include but may not be limited to mortgage loans, revenues, investments, reserves, and other fund balances, and total liabilities typically include the amount of debt outstanding in a given period and accrued interest. Asset-to-liability parity of over 100% indicates overcollateralization or net assets.

45.Debt service coverage (DSC).   A measure of the transaction's ability to cover bond debt service and associated fees from mortgage loan revenues and reinvestment earnings, if any. For purposes of these proposed criteria, DSC equals the revenue fund balance plus current mortgage loan principal and interest, less servicing and guarantee fees, all divided by bond principal, interest, and trustee fees in the same period.

46.Federal Housing Administration (FHA).   A U.S. government agency that provides mortgage insurance on loans made by approved lenders throughout the U.S. and its territories. The FHA insures mortgage loans on single-family and multifamily homes including manufactured homes and hospitals.

47.Government entities (GE).   U.S. government agencies such as the FHA or related entities such as Ginnie Mae.

48.Government-sponsored enterprise (GSE).   A type of financial services corporation created by the U.S. Congress. Well-known GSEs are Fannie Mae and Freddie Mac.

49.Guaranteed investment contract (GIC).   An agreement whereby the provider (or counterparty) provides a guaranteed rate of return in exchange for holding an investment for a fixed period of time.

50.Key transaction participants (KTP).   Any party whose failure to perform as contracted poses a risk to the credit quality of a transaction, such as to adversely affect the rating on the transaction. See also the Operational Risk criteria.

51.Negative arbitrage.   When the assets under the trust estate are earning interest at a lower coupon than the liabilities under the trust estate need to pay. Negative arbitrage is similar to reinvestment risk in that it could cause a cash flow shortfall to occur if no offsetting factors are present. Typically, negative arbitrage relates to the period of time from bond closing until the point where the mortgage loan(s) are originated and paying interest.

52.Parity resolution.  Parity resolutions are used broadly by HFAs to fund their mortgage lending programs. They are governed by a master agreement that provides, among other things, that multiple series of bonds may be issued and that owners of the each class of such bonds have an equal lien on the assets of the program.

53.Payment lag.  A delay in payment on the mortgage loan that is in addition to the time period encompassed from the date of origination until the first scheduled mortgage loan payment date.

54.PSA.   Prepayment speed assumption. For most single-family transactions, we review cash flows that use the Standard Prepayment Model for prepayment speed curve assumptions from the Securities Industry and Financial Markets Association. We may consider transactions that use an alternate prepayment speed curve on a case-by-case basis, depending on the historical information available.

55.Pass-through transaction  A transaction in which a mortgage loan or MBS pays principal and interest that is "passed through" on a monthly basis, and payments are used for debt service during the same period. Pass-through transactions typically have monthly payments and are not subject to a lag in mortgage loan or MBS payments, reinvestment earnings, or timing mismatches between the mortgage loan or MBS payment and the bond payment.

56.Recycling.   A financing tool used by housing issuers to preserve volume cap, wherein new bonds are used to refund existing bonds using the same volume cap and used to make new loans. Recycling is subject to certain time frames and provisions restricted by tax law.

57.Reinvestment risk.   When assets under the trust estate are reinvested at a rate that earns less than what is needed to pay debt service plus expenses. Reinvestment risk is similar to negative arbitrage in that a cash flow shortfall can occur if no offsetting factors are present. In general, it is associated with any unscheduled receipt of funds including other events such as casualty and condemnation receipts, insurance receipts, and other inflows from the mortgage loan(s).

58.Transaction documents.   Legal documents including, but not limited to, the trust indenture, loan agreement, mortgage, credit enhancement agreement, and other documents detailing the transaction's terms and provisions.

59.Whole loan.  Single mortgage loans that typically do not conform to GE/GSE program standards and are not securitized into MBS. These mortgage loans may have partial insurance from a mortgage insurer or may be uninsured.


60. This appendix provides additional information and proposed guidance related to our proposed criteria. We intend to publish this proposed guidance as a separate document following the publication of the final criteria article. For further information regarding guidance documents, see "Criteria And Guidance: Understanding The Difference," Dec. 15, 2017.

61. Guidance documents are not criteria, as they do not establish a methodological framework for determining credit ratings. Guidance documents provide guidance on various matters, including articulating how we may apply specific aspects of criteria, describing variables or considerations related to criteria that may change over time, providing additional information on nonfundamental factors that our analysts may consider in the application of criteria, and providing additional guidance on the exercise of analytical judgment under our criteria. Our analysts consider guidance documents as they apply criteria and exercise analytical judgment in the analysis and determination of credit ratings. However, in applying criteria and the exercise of analytical judgment to a specific issuer or issue, analysts may determine that it is suitable to follow an approach that differs from one described in the guidance document. Where appropriate, the rating rationale will highlight that a different approach was taken.

62. Specifically, this proposed guidance focuses on the following:

  • Hybrid programs
  • GE/GSE direct-pay CEIs
  • Application of Stressed Reinvestment Rate criteria and rating caps
  • Offsetting factors
  • Application of U.S. government support criteria

Hybrid Programs

63. In the cases where the loans in scope of the proposed FEH criteria are on parity with loans falling in scope of other criteria (such as "Single-Family Whole Loan Programs" or "Affordable Multifamily Housing Bonds"), our approach is to analyze each portion of the debt based on the respective criteria to which it applies and then combine our analysis to arrive at the final issue rating. If a hybrid program is predominantly made up of federally enhanced loans, we will typically apply these proposed criteria. However, for the purpose of the cash flow analysis, we would rely on the relevant other criteria to determine the potential losses on the non-FEH loans that would adjust the asset-to-liability parity for the combined portfolio.

64. In determining the asset-to-liability parity for the combined portfolio, we would take into account estimated losses from both analyses, and adjust projected asset-to-liability parity accordingly. For example, if an issuer has $100 million in debt that is supported by $40 million in loans that are in scope under these proposed criteria and $60 million in loans that fall under the scope of the "Single-Family Whole Loan" criteria, we would analyze the $40 million in loans under these proposed criteria and the $60 million under the "Single-Family Whole Loan" criteria (see table 4).

Table 4

Example Of A Hybrid Program
Hybrid program with beginning asset-to-liability parity of 110% and estimated losses of 8% for the whole loans MBS assets ($) Whole loan assets ($) Reserves ($) Liabilities ($) Net assets ($) Asset-to-liability parity (%)
40,000,000 60,000,000 10,000,000 100,000,000 10,000,000 110
S&P Global Ratings estimated losses - 4,800,000 - - - -
S&P Global Ratings adjusted 40,000,000 55,200,000 10,000,000 100,000,000 5,200,000 105.2

GE/GSE Direct-Pay CEIs

65. GE/GSE direct-pay CEIs may provide credit and liquidity support for fixed rate or floating-rate housing FEH bonds. Under the CEI, the GE/GSE is obligated to make payments to the trustee and cover the purchase price of tendered bonds in the event of a failed remarketing. 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.

66. S&P Global Ratings considers whether liquidity events such as mandatory or optional tenders are scheduled to precede the termination of the liquidity portion of the direct-pay CEI.

67. Direct-pay CEIs may include a mandatory tender upon substitution of an alternate credit facility without rating maintenance. This is a risk in the fixed-rate mode if the liquidity support has expired. To mitigate this risk, we would expect transaction documents to:

  • Limit substitution to the variable-rate modes;
  • Provide that the credit facility portion or a liquidity facility portion will be available to back the tender;
  • Indicate that credit facility expiration leads to a redemption; or
  • Indicate that substitution can only occur if remarketing proceeds equal to the full purchase price of the bonds are to be on hand for the substitution to occur, otherwise the credit facility will remain in effect or there will be a redemption of the bonds if the credit facility is scheduled to expire.

Application Of Stressed Reinvestment Rate Criteria And Rating Caps

68. To determine the impact of stressed reinvestment rate criteria and applicable rating caps on new transactions, we typically review cash flows dated from the mortgage loan or MBS delivery date to bond maturity. For existing transactions, we generally request updated cash flows from issuers at least annually, or if cash flows are not available, we request trust account balances and compare them to the projected balances on the most recent scheduled bond payment date as set out in the original cash flow projections that reflect our stressed reinvestment assumptions. If the actual account balances are lower than those that were projected in the original cash flows, we may generate our own cash flow projections. We then determine the rating, based on the stressed reinvestment assumptions used, as well as whether asset-to-liability parity falls below 100% and, when relevant, how soon DSC falls below 1.0x.

69. If a transaction's asset-to-liability parity approaches 100.25%, we would apply the stressed reinvestment assumptions to analyze the impact on projected asset-to-liability parity, potentially lowering the rating unless there are offsetting factors (see the examples that follow). In addition, in case the transaction does not pass the 'BBB' stressed reinvestment assumption, we would apply the speculative-grade stressed reinvestment assumption and further lower the rating as the date approaches on which projected DSC declines below 1.0x in accordance with table 3 of the proposed criteria.

70. The example in chart 2 shows that, although asset-to-liability parity is approaching 100.25%, the cash flows are sufficient using the stressed reinvestment assumption consistent with the GE/GSE rating level, and projected parity remained above 100% through maturity. This demonstrates cash flow sufficiency with minimal reliance on reinvestment earnings and would result in a rating equal to the GE/GSE rating (unless other adjustments apply), with the exact rating dependent on the holistic analysis.

Chart 2


71. The example in chart 3 assumes that asset-to-liability parity falls below 100% prior to maturity using the GE/GSE rating level stressed reinvestment assumption and no offsetting factors are present. While the cash flows are insufficient using the stressed reinvestment assumption in line with the GE/GSE rating level, they are sufficient using the 'A' rating level stressed reinvestment assumption, and asset-to-liability parity would be above 100% through maturity of the bonds. This would result in the rating in the 'A' category (absent offsetting factors or other adjustments), with the exact rating dependent on the holistic analysis.

Chart 3


72. The example in chart 4 assumes that asset-to-liability parity falls below than 100% prior to maturity and no offsetting factors are present. This example demonstrates an iterative application of stressed reinvestment assumptions to determine an appropriate rating level that corresponds to asset-to-liability parity above 100% through maturity of the bonds. In this example, the resulting rating is in the 'BBB' category (absent offsetting factors or other adjustments), with the exact rating dependent on the holistic analysis.

Chart 4


73. If projected asset-to-liability parity falls below 100% under a 'BBB' stressed reinvestment assumption scenario with no offsetting factors, we would apply our speculative-grade stressed reinvestment assumptions and then would assign a rating in the speculative-grade category, with the exact rating based on when we project DSC to fall below 1.0x during the life of the transaction as per table 3 of the proposed criteria. The further out that shortfall occurs, the more likely we are to assign a rating at the higher end of the speculative-grade range. This is because, in our view, there is a greater likelihood that circumstances could improve over a longer time, thereby enabling an issuer to avoid a potential default. For example, some issuers have, at their own discretion, opted to deposit cash from outside the trust estate (from a bankruptcy-remote source) in order to increase cash balances to a level that allows for full and timely payment of debt service through bond maturity. In other cases, we have seen issuers enter into an LOC, investment contract, or other credit enhancement that provides sufficient cash flow for the duration of the bond term.

Offsetting Factors

74. The ratings can be higher than those based on the Stressed Reinvestment Rate criteria and above caps in table 3 if one or several of the following offsetting factors are present:

75.a) Providing an LOC or any alternative credit enhancement.   To mitigate potential cash flow shortfalls or declines in asset-to-liability parity, an issuer may enter into an LOC or acquire alternative credit enhancement that enables sufficient cash flow to service the debt (sized to bond maturity), demonstrating the trust's ability to repay the drawdowns.

76.b) Additional deposit into the trust.   In the event of a projected cash flow shortfall or decline in asset-to-liability parity, an issuer or other transaction party could elect to deposit bankruptcy-remote additional resources such as cash or liquid assets into the trust. Some HFA parity resolutions have legal features that require maintenance of a certain asset-to-liability ratio, such that if the ratio falls below a certain point, the issuer agrees to deposit additional resources into the trust. We would view the existence of this type of covenant as an offsetting factor as well. We would request updated cash flow scenarios reporting that there is sufficient cash flow after the deposit is made, and demonstrating DSC over 1.0x for the life of the bonds.

U.S. Government Support Criteria

77. We may rate parity resolutions higher than the rating of the GE/GSE rating, if the asset-to-liability ratio is above 100.25% after applying our cash flow stresses and if the transaction meets the conditions of "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published Jan. 30, 2019.

78. The cash flow stress includes:

  • The haircut due to the mortgage insurer being rated lower than the rating on the transaction based on the application of the "Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds," published on Dec. 7, 2014, and
  • 0% stressed reinvestment earning assumption (a 'AAA' reinvestment rate assumption).


Criteria to be fully superseded
  • Ginnie Mae, Fannie Mae, And Freddie Mac Multifamily Securities, June 26, 2007
  • FHA Insured Mortgages, June 18, 2007
  • Single-Family Mortgage-Backed Securities Programs, June 13, 2007
  • Methodology For Certain Housing Bond Transactions Supported By U.S. Government Agencies And Government-Sponsored Entities, Dec. 17, 2014
Related Criteria
  • Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
  • Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
  • Methodology And Assumptions For Stressed Reinvestment Rates For Fixed-Rate U.S. Debt Obligations, Dec. 22, 2016
  • U.S. Government Support In Structured Finance And Public Finance Ratings, Dec. 7, 2014
  • Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds, Dec. 7, 2014
  • Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
  • Global Derivative Agreement Criteria, June 24, 2013
  • Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
  • Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
  • U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter, April 30, 2012
  • Principles of Credit Ratings, Feb. 16, 2011
Related Guidance
  • Cash Flow Scenarios and Assumptions For U.S. Public Finance Housing Bonds, Sept. 4, 2019
Related Research
  • Request For Comment: Methodology To Derive Stressed Interest Rates In Structured Finance, April 16, 2019

This report does not constitute a rating action.

The proposed criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Once proposed criteria become final, their use is determined by issuer- or issue-specific attributes as well as our assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment.

Analytical Contacts:Aulii T Limtiaco, San Francisco (1) 415-371-5023;
Marian Zucker, New York (1) 212-438-2150;
Jose M Cruz, San Francisco (1) 415-371-5053;
Vikas C Jhaveri, New York (1) 212-438-3693;
Criteria Contacts:Andrea Quirk, London (44) 20-7176-3736;
Olga I Kalinina, CFA, New York (1) 212-438-7350;
Steve C Tencer, CPA, New York (1) 212-438-2104;

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