LOS ANGELES -- Standard & Poor’s has proposed a new methodology for rating multifamily affordable housing bonds.
The criteria will cover bonds supported by unenhanced affordable housing projects, federally subsidized projects, and privatized military housing projects, as well as bonds backed by multifamily loan pools.
“The proposed criteria establish a single, comprehensive framework for evaluating both stand-alone transactions and multifamily loan pools,” analysts said in a report.
The proposed criteria is expected to affect no more than 450 rated issues, comprising about 160 projects or programs. S&P expects that around 85% of the ratings will remain unchanged, 5% may be upgraded, and 10% may be downgraded.
The expected average rating change is approximately two notches for the affected issue ratings.
One of the key analytical components of the rating methodology will continue to be the evaluation of the underlying real estate collateral’s credit quality, but beyond that there are some fundamental differences in the new criteria.
First, the methodology uses a recovery based approach for stand-alone transactions that assumes a loan default and subsequent liquidation of the property. The current methodology does not assume a default in stand-alone transaction.
The criteria will use the commercial mortgage-backed security criteria’s default and rate assumptions for multifamily loans and adopt the same approach used by the CMBS criteria to derive a transaction’s credit enhancement levels.
In addition, S&P is a proposing a framework for scoring and weighting qualitative factors which are assessed under the current criteria. These factors include owner and sponsor experience, management, strategy, asset quality, economic fundamentals, and government support.
The new criteria also incorporate the public-purpose nature of affordable housing programs by combining the CMBS real estate analysis with the municipal enterprise framework for assessing enterprise and financial risk.
S&P issued a request for comment on the new criteria on Monday, asking market participants to submit any comments by June 1. Once the comment period is over, the comments will be reviewed and the final criteria will be published. S&P did not state how long it expects to take to come out with a finalized new methodology.
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