Publication date: 20-Dec-2001

Publication date: 20-Dec-2001
Reprinted from RatingsDirect

Commentary
Spotlight on Affordable Multifamily Housing Asset Pools
Analyst: Christopher P Moriarty, New York (1) 212-438-2063; Steve Tencer, New York (1) 212-438-2104; Wendy Dolber, New York (1) 212-438-7994

Standard & Poor's has been rating debt obligations secured by pools of affordable multifamily housing projects for a number of years. Until several years ago these debt obligations had been issued only by state housing finance agencies (HFAs), but now other issuers are taking advantage of pooling affordable multifamily assets to secure debt obligations and obtain the rating benefits of pooling. These obligations from other issuers can take the form of REMICs (real estate mortgage investment conduits structures for taxable affordable housing mortgages) or CBOs (collateralized bond obligations for pooling tax exempt housing bonds). Looking at how issuers have been using debt to finance pools of affordable housing assets can give industry participants examples of techniques to achieve more efficient financings. HFA issuers can observe how techniques used in commercial transactions have been imported to the municipal finance world and non-HFA issuers can learn from HFA issuers on managing finance programs for constructing new affordable housing.

Issuers and Structures

Pooled multifamily debt obligations issuers.

HFAs have been the traditional issuers of pooled multifamily debt. California Housing Agency (CaHFA), Colorado Housing and Finance Authority (CoHFA), New York State Housing Finance Agency (NYSHFA), New York City Housing Development Corporation (NYCHDC), Minnesota Housing Finance Agency (MHFA), and Virginia Housing Development Authority (VHDA), among others, have recently been joined by other issuers of affordable housing debt such as Charter Mac, Impact Community Capital LLC, National Housing Trust, and San Diego Family Housing LLC (see table). Other issuers contemplating issuing debt backed by affordable multifamily assets are mutual funds, affordable housing loan consortia, and investments banks using CBOs & REMICs. These new issuers have been using pooled assets to issue debt because:

* Given the right assets pools can obtain higher ratings and

consequently lower the interest cost of debt;

* Bundling assets lowers transaction costs; and

* It offers balance sheet liquidity.

Some of these issuers are issuing debt backed by pools of assets with national diversification vs. the strictly one-state pools of HFAs.

Debt obligation structuring.

Like the assets that support these bonds, the methods for structuring the bonds also vary. The most common methods used for structuring pools of multifamily assets are:

* Mortgage revenue bonds - open parity resolutions,

* Mortgage revenue bonds - closed resolutions,

* CBOs; and

* REMICs

Mortgage revenue bonds - open parity resolutions.

HFAs most commonly use the open parity resolution. Under this method, HFAs such as CaHFA, CoHFA, MHFA and VHDA use an open parity resolution to issue several series of bonds. All revenue bonds issued under the resolution are secured by the same pool of assets and carry the same bond rating. The Standard & Poor's ratings on these resolutions range from 'A' to 'AAA'.

Mortgage revenue bonds - closed resolutions.

Closed parity resolutions are utilized in cases where issuers come to market less frequently, choose not to pool their assets under one resolution, or desire to change terms of the bonds with each new issuance. Under these situations, an issuer chooses to finance a discrete pool of assets and support them by one bond issuance (which may or may not have multiple tranches).

CBOs.

Under the CBO approach, bonds are pooled into a master trust and the trust issues certificates that are backed by the pool of bonds. Payments on the underlying bonds are utilized to secure the obligations of the trust. Like other pools of assets, CBOs can achieve benefit from obligor and geographic diversity. CBOs offer greater geographic diversity than open parity or closed resolutions in that CBOs can pool assets from different states while the other two methods typically have assets that are state-specific. The greater the diversity, the lower the risk to exposure in adverse economic conditions. If properly structured, buyers of CBO debt instruments should be able to enjoy the tax-exempt nature of any tax-exempt bonds owned by the CBO.

REMICs.

REMICs, like the other pooled transactions, offer bondholder security in that a pool of assets supports the obligations. Like CBOs, the pool of assets can be geographically spread in more than one state. The difference between CBOs and REMICs is the underlying asset being securitized. The assets being used for collateral in a REMIC are mortgage loans. The debt obligations of REMICs are taxable as they cannot issue tax-exempt debt and cannot pass through the tax-exempt nature of any tax-exempt debt instruments that they own to the buyers of REMIC securities.

Assets Being Securitized in Pools

Straight multifamily pools vs. mixed loan type pools.

Some HFAs, such as Connecticut and Tennessee, combine both multifamily and single family mortgages in their pools. The credit and prepayment characteristics of single and multifamily loans are very different but the risks of each can be analyzed and provided for. The diversity of assets adds strengths to the bond programs. However, some investors may prefer not to see the two types of assets in the same pools. Only HFAs bundle these types of mortgages together for debt issuance.

Credit-enhanced mortgage vs. non-enhanced.

Most of the mortgages and bonds in affordable multifamily pools do not have credit enhancements but some do. Many HFAs have mixed pools with credit enhanced and non-credit enhanced assets. CoHFA, for instance, includes as assets in its pools mortgages that have mortgage insurance from FHA. The fact that some assets may be credit enhanced and the strength of the credit enhancer obviously have implications for the debt ratings the pool will obtain and/or collateralization levels for tranching. Tranching would enable pools with 'AAA' rated credit-enhanced assets to obtain and assign those assets to a 'AAA' rated tranche.

Diversification of affordable housing programs in pools.

Ultimately, all of the assets being securitized finance affordable multifamily housing in some form which involve properties in different government-sponsored programs. Some of the oldest HFA pools finance properties with Section 8 rental subsidies (such as VHDA). A number of issuers have mortgages or bond obligations in their pools that finance low-income housing tax credit properties (Impact Community Capital LLC, Charter Mac, and VHDA). Other issuers include properties owned by not for profits (Texas Affordable Housing Corporation Multifamily Housing Revenue Bonds (NHT/GTEX Project Portfolio series 2001)), mortgages with Section 236 federal interest subsidies (New York State Urban Development Corporation Corporate Purpose Senior Lien Bonds), bonds financing 80/20 properties (Charter Mac) or mortgages secured by military housing projects (San Diego Family Housing LLC). Pools with diversification of different programs generally are considered stronger because of less reliance on changes in a single government program that can have credit implications for the underlying mortgage assets.

Construction risk in pools.

Unlike the CMBS pools, which avoid construction risk, affordable multifamily-pooled transactions will sometimes include projects under construction. HFA issuers such as VHDA include mortgages on projects under construction because their mission is to foster the development of new multifamily affordable housing. VHDA, for instance has about 7% of its mortgages on projects under construction. Other HFAs have some construction risk, such as CoHFA, but it is partially covered under the HUD risk share program. The San Diego Family LLC, has construction risk but it is staged over time, continuation is tied to specific targets, is covered by payment and performance bonds, has oversight from the Navy and outside third party construction consultants, and the project has a long waiting list of military families as prospective tenants. These issuers have staffs to monitor the construction process and have a long history of projects being completed on time and on budget. Due to the demand for affordable housing and the affordable rents being charged at the project, there is a good history of projects being leased on time and meeting debt service coverage targets. Standard & Poor's monitors the construction risk in these pools to determine if it is affecting credit quality.

Geographic diversification of assets in affordable multifamily pools.

Until recently affordable multifamily pools have been single-state pools because of legal restrictions on HFA issuers. However, newer pools from non-HFA issuers can and have shown cross-state line diversification making them stronger from a rating perspective, all other pool characteristics being equal. The Impact Community Capital pool is diversified across state lines with 58% of the pool being located in California, 14% in Texas and 28% in 13 other states. Two of the Charter MAC pools are diversified across state lines (the NAT 1 and 2 series) whereas the CAL 1 and CAL 2 series are concentrated in California to get the maximum benefit of state tax exemption for California investors. Typically, in CMBS transactions the assets need to have wide geographic diversification in order to obtain high investment grade ratings. A single state pool such as a state agency pool would not have geographic diversification to achieve high ratings. However, HFA single-state pools have strengths which enable them to achieve high ratings despite lack of diversification such as strong demand for affordable housing in most markets, strong oversight from state agency asset managers, and strong over-collateralization.

Affordable multifamily pool debt obligation interest rate structures.

The type of assets in a pool and the interest rate environment will be a major determining factor in the type of debt structure being used in multifamily pooled transactions. Most of the affordable housing pools have fixed rate mortgages or bonds in their pools with fully amortizing loans. This makes for stability of interest income and principal repayments on the asset side. However, structures may vary. Transactions with fixed-rate assets and floating-rate liabilities (or vice versa) need to provide for coverage of the interest rate risk in order for issues to receive investment grade ratings.

HFA resolutions.

HFA resolutions typically are very conservative and issue debt with tax-exempt fixed-rate bonds usually matched to provide a spread over the fixed-rate asset collateral, although some such as CaHFA and CoHFA issue floating-rate debt. Most of the HFA debt has been of a relatively straightforward structure with terms and serial bonds. Only CaHFA, among all HFAs, has been observed using CABs, PACs or other kind of planned amortization bonds. Such structures can be beneficial as long as appropriate stress runs reflect worst-case scenarios.

CBOs.

CBOs can have either fixed-rate or floating-rate obligations or a combination. CBOs with floating-rate structures with put features typical of municipal variable rate transactions will need liquidity providers to cover remarketing risk. For example, the Charter Mac Low Floater Variable Rate Trust Certificates series CAL 1 and 2 and Nat 1 and 2 use floating-rate liabilities with a put feature and a liquidity facility to cover remarketing risk. These certificates are rated 'AAA/A-1' due to bond insurance from MBIA and 'A-1' rated liquidity providers. The assets securing the pool are fixed-rate - the pool has a cap on the rated floating-rate certificates plus overcollateralization to cover the variable interest rate risk. Using a variable-rate liability structure financing fixed-rate assets enables Charter Mac to earn a sizable interest rate spread when municipal bond variable interest rates are low as they are now.

REMICs.

REMICS have features that give them substantial freedom in structuring transactions with separate tranches which carry different interest rates based on credit tranching. REMICs use either a fixed-rate interest rate structure or a weighted average N rate tranche structure where the interest rate paid on the certificates is the weighted average of the underlying mortgages (which changes as the weighted average changes over time) plus or minus a spread. The Impact Community Capital LLC transaction is a weighted average N rate structure that passes the interest rate risk on mortgage assets to investors. As the Impact mortgage loans all have different interest rates as loans prepay, the weighted average may also change.

Other interest rate structures.

Single issuers of pooled transactions typically have more flexibility in structuring transactions with regard to debt and interest rate risk. The San Diego Family Housing LLC is a pool of 20 Navy multifamily projects located in San Diego owned by a single obligor. The obligor chose an auction variable rate structure (with no investor puts), which is wrapped with an interest rate swap. So even though the borrower is issuing floating rate certificates, it ends up paying a fixed-rate of interest. This structure enables a borrower to obtain a lower fixed-rate of interest than doing a straight fixed-rate bond structure.

Tranching and credit support on multifamily pooled asset debt obligations have allowed issuers to obtain higher ratings.

Because of greater diversification and credit strengths pools have enabled issuers to obtain higher ratings than for transactions with single assets or single borrowers. Standard & Poor's has to date rated single asset transactions or single borrower affordable multifamily pools no higher than 'A+'. The San Diego Family Housing LLC and Texas Affordable Housing Corporation Multifamily Housing Revenue Bonds (NHT/GTEX Project Portfolio series 2001) are examples of 'A' rated single-borrower pooled affordable multifamily transactions. In contrast, debt obligations backed by pools have been awarded ratings as high as 'AAA'. To obtain high ratings ('AA' and 'AAA') pools need to provide sufficient diversification as well as strong credit support. HFA bond resolutions have typically done this with over-collateralization of liabilities with investments, mortgages, or with general or moral obligation pledges from rated states or HFAs. 'AAA' ratings, however, may be obtained only through very strong credit support or the general obligation pledge of a 'AAA' rated entity. The VHDA and CaHFA multifamily bond resolutions are two resolutions that have general obligations pledges of their respective HFAs. Moral obligation pledges were very common in early HFA programs as well as mixing multifamily loans with high quality single-family loans.

Historically many of the state HFA pool ratings such as VHDA were based on the moral obligation pledge of the state. Over time, the resolutions gained financial strength and due to the strong management and oversight many could be rated based upon credit fundamentals of the pool of loans rather than the moral obligation pledge of the state.

One of the HFA multifamily resolutions which uses tranching to obtain higher ratings is sponsored by CoHFA. Under this method, CoHFA allocates bonds to the specific asset classes. By employing this technique, CoHFA achieves a more efficient execution (lower debt service) and thereby lowers the overall bond debt service. Rather than having all of the bonds with one rating, each class of bonds has a different rating. This allows the agency to achieve a higher rating for a significant portion of the bonds. The least risky assets are allocated to the senior bonds. Assets that have a slightly higher risk profile secure the bonds in the mezzanine class and the subordinate tranche is rated based upon the GO pledge of the issuer. Under this resolution CoHFA has issued $133 million in bonds to finance 105 projects. Currently 85% of the bonds (the senior bonds) are rated 'AAA' or 'AAA/A-1+', 12% (the mezzanine bonds) is rated 'AA' and 3% of the bonds is rated 'A+'.

New York State Urban Development Corporation Corporate Purpose senior and subordinate bonds is another HFA resolution that also uses a multiple tranche structure. The bonds are secured by a pool of approximately 104 multifamily mortgages in New York some of which have Federal 236 interest rate subsidies. The bonds are in two tranches, senior and subordinate, with the tranches sized so that 236 interest rate subsidies cover debt service on the senior bonds and mortgage payments from the owners provide credit support for the senior bonds and also provide coverage at well over one times coverage for payment of the subordinate bonds debt service. The senior UDC tranche is rated 'AAA' and the subordinate tranche is rated 'A'.

Most non-HFA multifamily pools use overcollateralization through tranching to provide credit support for higher tranches and therefore higher ratings. The Impact REMIC pooled transaction of $164 million in pass-through certificates has five tranches, four of them carrying 'AAA', 'AA', 'A', and 'BBB' ratings, and one not rated. Payments to the lower rated tranches are subordinate to payments to the higher rated tranches. The structure uses a fast pay/slow pay payment structure such that all principal payments are allocated to the 'AAA' rated tranche first until all 'AAA' rated certificates are redeemed, in which case the payments are then allocated to the 'AA' rated tranche. All mortgage interest is passed through monthly to all tranches. If there is a shortfall the lowest subordinate tranche is allocated the shortfall first. Due to the overcollateralization the 'AAA' rated tranche has an effective LTV of about 60% and debt service coverage of about 1.65 times. The fast pay/slow pay structure allocates all principal payments to the higher rated tranches first to ensure that the credit support percentages are maintained over time.

The Charter Mac CBO is unusual for a non-HFA transaction in that it is a large, widely diversified, multifamily pool with four series of certificates, each having only one tranche. However, Charter Mac obligations are creditworthy due to very high over collateralization. It is limited by corporate bylaws to a debt-to-equity ratio of 50%.

Techniques that have been developed in the CMBS and CBO taxable securities markets are now available to more equitably determine and pass on the credit and interest rate risks in affordable multifamily pools. Techniques such as tranching, pass through debt instruments, geographic diversification and program diversification provide for better allocation of risks of investing in affordable multifamily housing pool debt to different classes of investors therefore resulting in more efficient pricing which can be passed on to affordable housing borrowers as does the use of variable rate debt. In addition, the experience of some HFA issuers in financing affordable housing construction can provide lessons and guidelines for other issuers of pooled multifamily housing debt.

Thank you for letting us be of service to you.

Wendy Dolber - Managing Director - 212-438-7994

Public Finance Housing Ratings

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Table 1A Selected Affordable Multifamily Pooled Transactions

Issuer

Charter MAC Low Floater Certificate Trust I

New York State Urban Development Corporation

Impact Community Capital, LLC

Colorado Housing & Finance Authority

California Housing Finance Agency

Sponsor (if different)

Charter MAC

Empire State Urban Development Corporation

Impact Community Capital, LLC

Issue name

Charter MAC Floater Certificate Trust I defined portfolio variable rate demand certificate of beneficial ownership series CAL-1 & NAT-1

New York State Urban Development Corporation corporate purpose subordinate lien bonds series 1996

Impact Community Capital LLC commercial mortgage pass-through certificates

Colorado Hsg and Fin Auth multifamily project class III bonds ser 2000A-3, 2001A-1; class I series B-2 & B-4

California Housing Finance Agency multifamily Housing Revenue Bonds III multiple series

Structure

CBO - insured liquidity

State HFA multifamily indenture

Taxable REMIC

State HFA multifamily indenture

State agency GO

Number of tranches

4 (only 3 active)

Rating

AAA/A-1

AAA/A

AAA, AA, A, BBB

AAA/A-1+, AAA, AA, A+

AA-/A-1+

Bond insured?

Yes

Partial

Date pool first rated

2001

1996

2001

2000

1997

Par amount of debt outstanding ($ mils)

350

529

165

170

582

Fixed rate/floating rate liabilities

Floating

Fixed

Both

Floating

Parity debt?

Yes

Any other credit support?

Yes

If so what?

FHA/FHA risk share

FHA/FHA risk share; GO pledge

No. bond issues outstanding

Fixed rate/floating rate assets

Fixed

Both

Fixed

Bond structure (e.g. terms, cabs, PAC bonds)

Low floater pass-through certificates

Terms and serials

Pass-through certificate

Terms and serials

Serials, CAB, terms, VRDO

No. assets in pool

104

107

114

105

Type of debt assets in pool

Tax-exempt bonds

Multifamily mortgages

Type of real estate assets securing debt: (% of each program)

50% LIHTC & 50% 80/20

Section 8, Sect 236 & Mitchell-Lama

85% LIHTC 15% Affordable

Sect 8, Assisted Living, Elderly

Sect 8, FHA, uninsured

Owner diversity

Widely diversified

Geographic diversity

12 states

New York only

15 states

Colorado only

California only

Construction loans

Yes

Percentage of construction loans?

Of 14 new loans there are 6 construction loans(4 with insurance, par amts $24 mil. 2 no insurance with a par amount under $1 mil)

Overall debt service coverage of rated securities

1.17

1.25

1.30

1.18

Overall mortgage LTV of all rated securities (%)

105

Pool parity - e.g. assets to liabilities percentage

218

No change

102

Rating history

Stable since rated

No. problem loans but no foreclosures

Par amount for each rating ($ mils.)

AAA

275

450

131

126

AA, AA- and AA+

582

A, A-, A+

140

BBB, BBB-, BBB+

NIG

Total

275

590

164

165

582

Table 1B Selected Affordable Multifamily Pooled Transactions

Issuer

Texas State Affordable Housing Corporation

Virginia Housing Development Authority*

Minnesota Housing & Finance Agency

San Diego Family Housing LLC

Sponsor (if different)

Issue name

Texas State Affordable Housing Corporation multifamily mortgage revenue bonds (NHT/GTEX Project Portfolio) series 2001

Virginia Housing Development Authority multifamily housing bonds multiple series

Minnesota Housing & Finance Agency rental housing bonds multiple series

San Diego Family Housing LLC military housing revenue obligations series 2001A

Structure

501(C)3 bonds

State HFA multifamily indenture

Military housing obligations

Number of tranches

Rating

A, BBB-

AA+

AAA, A (SPUR)

Bond insured?

Partial

Yes

Date pool first rated

2001

1979

1988

2001

Par amount of debt outstanding ($ mils)

1,700

271

235

Fixed rate/floating rate liabilities

Fixed

Floating

Parity debt?

cross collateralized

Yes

Any other credit support?

Yes

If so what?

GO pledge of issuer, moral obligation on some

No. bond issues outstanding

103

Fixed rate/floating rate assets

Fixed

Bond structure (e.g. terms, cabs, PAC bonds)

Terms

Terms and serials

Auction floating rate

No. assets in pool

475

250

Type of debt assets in pool

Multifamily mortgages

Type of real estate assets securing debt: (% of each program)

Affordable multifamily

Tax credit FHA Sect 8 & 80/20

State subsidized, Section 8 & Section 236, market rate

Military housing projects

Owner diversity

1 not-for-profit owner

Widely diversified

1 owner - jv between US Navy and for-profit developer

Geographic diversity

Texas only (Houston & Dallas)

Virginia only

Minnesota only

San Diego County only

Construction loans

Yes

Percentage of construction loans

Overall debt service coverage of rated securities

1.30

1.67

1.22

Overall mortgage LTV of all rated securities (%)

100

Pool parity - e.g. assets to liabilities percentage

100

140

123

Rating history

New rating

'AA+' since inception

Rated 'A+' in 1998 based on collateral till 1995 when rated based on MHFA GO. Upgraded to 'AA+' in 2001

New rating

No. problem loans but no foreclosures

less than 1%

Unknown

Par amount for each rating ($ mils.)

AAA

191

235

AA, AA- and AA+

1,700

A, A- and A+

235 (SPUR)

BBB, BBB- and BBB+

NIG

Total

1,700

271

235