In this article, S&P Global Ratings provides background information on static pools, how we assess them, and the factors that can affect their credit quality.

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Frequently Asked Questions

How does S&P Global Ratings define static pools?

We define static pools as multifamily bond transactions secured by a pledge on a fixed number of underlying multifamily mortgage loans. These pools are structured without the ability to issue additional bonds or contribute additional loans. Static pools differ from managed pools, in which new loans and additional debt could be added to the portfolio, and portfolio managers could actively readjust the pool composition to account for loan performance, manage risks, and create annuity income. Moreover, loans within a static pool are typically underwritten with similar guidelines and policies.

The security on the bonds is the mortgage loans on underlying properties that are not cross-collateralized. The flow of funds of the mortgage loan payments are typically structured as monthly pass-throughs with administrative fees paid first (e.g., servicer fees, trustee fees), followed by debt service payments, and replenishment of reserves (if applicable).

What is S&P Global Ratings' view on static pools' performance?

We expect stable performance for static pool transactions. Our view reflects the operating performance and financial strength of the loans and the high asset quality of the mortgage collateral in the static pool portfolios. S&P Global Ratings rates 11 static pool bond transactions with a total of 21 public ratings, 10 of which are on class I bonds. In aggregate, the rated static pool bonds are secured by approximately 544 multifamily projects, with a combined average of 1.79x debt service coverage, combined loan-to-value ratio of 44%, and 97% occupancy rate. The underlying multifamily mortgage loan portfolios consist of $3.05 billion in aggregate loans outstanding securing $3.03 billion in static pool bonds outstanding. The median asset-to-liability (A/L) parity is 105%.

Approximately 90% of the underlying mortgage loans receive Low Income Housing Tax Credit (LIHTC) subsidies, which we view as a credit strength due to the additional oversight of the program from investors and regulators.

Additional support is also available from the transactions' servicers through servicer advances in case of insufficient loan payments.

What challenges does S&P Global Ratings anticipate with static pools?

Due to the COVID-19 pandemic, and the nationwide eviction moratorium, properties may experience increasing delinquencies, which in turn could pressure rental revenues. While the federal government's funding of the Emergency Rental Assistance Program has allocated significant resources to assist renters and landlords experiencing delinquencies, properties may face short-term pressures. These factors could result in loan delinquencies within a static pool portfolio, which could lead to servicer advances, loan modification, or ultimately a foreclosure on the distressed project.

If a loan becomes delinquent, what are the typical recovery mechanisms?

When a loan is distressed and delinquent, the master servicer could advance loan payments on the project's behalf. Generally, if the loan remained delinquent, it would be transferred to special servicing. The special servicer would take a number of steps to determine various recovery plan options for the delinquent loan, as outlined in the trust agreement and servicing agreement for the transaction. Generally, any plan involving a loan modification, forbearance, loan sale, or foreclosure requires the trustee to obtain the majority approval of the bondholders. Typically, no further principal on the loan will be distributed to certificate holders until a recovery plan is implemented.

How does S&P Global Ratings assess static pools under the new rental housing bonds criteria?

Our assessment of static pools in the rental housing bonds (RHB) criteria focuses on three key credit factors: coverage and liquidity reserves, management and governance, and market position.

The coverage and liquidity assessment accounts for 50% of the indicative score used to determine the rating under our criteria. Coverage is determined by comparing available overcollateralization--as represented by the class and consolidated trust's A/L parity ratio (parity)--to a credit loss assumption that reflects underlying loan characteristics, loan concentration risk, and consideration of other available credit enhancement (e.g., mortgage insurance, risk share, or other guarantees).

Liquidity is determined by comparing available liquidity at the transaction level to the applicable 12 months of debt service. For example, a source of available liquidity could be from reserves at the transaction level or subordinate debt. Loan-level reserves are not included in our A/L parity calculation. While we do consider the presence of loan-level reserves when evaluating the underlying loan characteristics, because those funds are not directly available to bondholders and the loans are not cross-collateralized, they do not meet our definition of liquidity for static pool analysis.

Management and governance accounts for 30% of the indicative score used to determine the rating. We assess how management and governance is likely to affect the transaction's ability to service debt over time. For static pools, our evaluation of management and governance is generally based on our view of the servicer(s), the sub-servicer(s), or both. In addition, in the case of static pool conduit issuances, in which a housing finance agency (HFA) is the conduit issuer, the transaction may benefit from the involvement and incentives of the HFA, and we generally apply a positive adjustment in management and governance.

Our market position assessment captures factors that affect the supply-and-demand dynamics for the rental units of the project, and accounts for 20% of the indicative score used to determine the rating. We evaluate both property-specific characteristics, such as the physical condition of the property, its curb appeal, its occupancy trends, and the demand/supply considerations that may affect the property's market position, such as trends in target population and presence of competing rental developments, with the emphasis on the locations that represent the largest share of the pool by loan balance.

What are the key differences between highly rated static pools and low-investment-grade-rated static pools?

High parity and subordination levels typically differentiate high-investment-grade-rated static pools from low-investment-grade-rated static pools. The parity ratio is the primary component of the coverage and liquidity assessment in the RHB criteria and accounts for 50% of the indicative score to determine the rating. Static pools rated in the 'A' category or above have a median parity ratio of 117%, compared with 104% median parity for static pool bonds rated in the 'BBB' category or below.

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