By: Bernard Hecht
In a tax-exempt housing bond structure, the revenues from the underlying assets – mortgages, bond proceeds account (sometimes called the acquisition fund), reserve funds and (short-term) float interest – are calculated to provide sufficient money for the bondholders. However, additional funds may also be available over the life of the deal, primarily due to surpluses, mortgage prepayments, reduction in the reserve requirements, loans not coming to fruition (undisbursed bond proceeds) and insurance reimbursements.
SS&C’s DBC Housing allows the user many options regarding the transfer of excess funds to the redemption accounts. Also, it allows plans of action or “schemes” for how these funds will call individual bonds, both within the financing and/or cross calling to other bond series (subjects of future articles) and the restrictions of the use of the funds after deposit prior to bond redemptions.
Examples of these options include:
- Restricting the use of these funds to make them available only insofar as they are not needed for upcoming debt service; also allowing this restriction to be based on a percentage – or additional coverage factors – of the future debt service
- Allowing the redemption accounts to be drawn upon to cover shortfalls only after reserve funds have been depleted or only beginning and ending on certain dates
- Allowing for prioritizing the different redemption accounts to be used for shortfalls
- The ability to repay draws from these accounts in surplus years
- Protecting specific dollar amounts per periods or dates
- Lagging the redemptions
- Withholding early redemption premiums payments to the bondholder if required
- Options for the automated restriction of these deposits to meet 10-year rule requirements
- Distributions can be changed based on different conditions such as date, target parity, asset coverage amount, or bond retirement
These are just some of the choices that DBC Housing provides for redemption account funds through simple automated drop-down menus.