Criteria for Rating German Residential Mortgage ... - Standard & Poor's

expenses. This amount depends on the size of the transaction, and can be modeled either as a separate contingency
reserve or a haircut to the reserve fund, or can be addressed through an appropriate guarantee.
Substitution of Assets
Some transactions allow for the substitution of mortgage loans as the original mortgage loans repay. In order to
ensure that the credit quality of the portfolio does not deteriorate, a substitution model has been developed for use
by originators. This model should be run for each substitution to ensure that the level of credit enhancement remains
sufficient.
Criteria Structured Finance RMBS: Criteria for Rating German Residential Mortgage-Backed Securities
Additional requirements include a limitation on how many loans may be substituted in any one quarter (10% of
principal outstanding), a cap on the proportion of delinquencies on the existing pool (cannot exceed 2% of principal
outstanding), and a restriction on the proportion of the first loss tranche used to cover losses (no more than 25%).
Documentation Aspects of Synthetic RMBS Transactions
Given that a high proportion of German RMBS transactions are synthetic transactions, a number of important
documentation issues are highlighted below.
Definition of Losses
In synthetic transactions, losses can be divided into principal losses, interest losses, and losses associated with
foreclosure costs. It is also possible to differentiate between losses occurring on the balances of the loans to be
securitized, and the same losses occurring on prior-ranking loans that are not included in the securitization.
It is important that the documentation clearly specify which risks are being transferred. The originator sets the
definition of losses arising from the reference pool for which it is seeking credit protection. Therefore, the loss
definitions can differ from one transaction to another. While the definition of losses can be tailored for the reference
pool, it is not possible to do this for prior-ranking loans that are not in this pool.
Accordingly, Standard & Poor's needs to know the prior-ranking balances, held with third party banks or the
originator (or both), to be able to calculate losses which will occur on these prior-ranking balances. In addition, the
allocation of recoveries in the synthetic waterfall needs to reflect the degree to which accrued interest and
foreclosure costs have been excluded from the loss definition. If these items have been excluded, then they must rank
junior in the waterfall.
Conditions for Loss Allocations
The conditions under which losses are allocated are key in synthetic transactions. The trustee's plausibility check of
transaction reports, its audits of loans that lead to losses (eligibility criteria, credit and collections procedures, and
servicing practices, as determined in the offering circular), and the timing of loss allocations are regarded as crucial.
In addition, the scope of the audits with respect to the eligibility criteria, credit collection policies, and other
servicing requirements is considered to have a crucial effect on the transaction.
Extension Risk
German repayment mortgage loans allow certain terms of the mortgage, namely the interest rate and the
amortization rate, to be renegotiated at the refix (renewal) date. If the borrower renegotiates amortization rates at
the refix date, this can extend the final maturity of the mortgage loan.
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