Criteria for Rating German Residential Mortgage ... - Standard & Poor's
Criteria for Rating German Residential Mortgage ... - Standard & Poor's Criteria for Rating German Residential Mortgage ... - Standard & Poor's
Criteria | Structured Finance | RMBS: Criteria for Rating German Residential Mortgage-Backed Securities (Editor's Note: This criteria article originally was published on Aug. 31, 2001. We're republishing this article following our periodic review completed on March 31, 2011. These criteria have been updated and clarified by "Methodology And Assumptions: Update To The Criteria For Rating German Residential Mortgage-Backed Securities," published on Jan. 6, 2009. Also, part of these criteria have been superseded by "Cash Flow Criteria for European RMBS Transactions," published on Nov. 20, 2003, and "Methodology And Assumptions: Update To The Cash Flow Criteria For European RMBS Transactions," published on Jan. 6, 2009.) This article details Standard & Poor's rating approach to German residential mortgage-backed securities (RMBS). This approach is based on a detailed analysis of German mortgage originators' underwriting and servicing procedures and the performance of residential mortgages in the German market, and on the surveillance of rated German RMBS transactions since 1998. German mortgage transactions rated by Standard & Poor's to date have included mortgage assets originated by the following banks: • Landesbanks; • Commercial banks; • Private banks; • Mortgage banks; • Cooperative banks; and • Savings banks. For the purposes of this article, residential mortgage loans refer to loans taken out by individuals, or in certain circumstances, companies, to finance the purchase of residential properties located in Germany. Typically, German lenders look to the use of the property, rather than the status of the borrower, in determining whether a loan is classified as residential. German RMBS transactions to date have employed both "true sale" and "synthetic" structures, outlined below and in table 1. This article addresses both types of transactions, and highlights the differences in the approach where necessary. A comparison with the German Hypotheken Pfandbriefe is also included in table 1. This article does not outline Standard & Poor's approach to rating Hypotheken Pfandbriefe (see "Criteria for Rating German Pfandbriefe", published on RatingsDirect on July 7, 1997 for further details of this approach). Hypotheken Pfandbriefe has been included for comparison, as it bears certain similarities to RMBS, and is an important instrument for funding mortgage lending in the German market. Standard & Poors | RatingsDirect on the Global Credit Portal | August 31, 2001 2 867630 | 300323561
Traditional True Sale Structures Few German RMBS transactions to date are structured as traditional true sale transactions. This involves the sale of a pool of residential mortgage loans to a bankruptcy-remote special-purpose entity (SPE), which then issues a number of tranches of rated notes. The key drivers for these types of structures are fundraising, balance-sheet management, and risk management. Synthetic Structures Synthetic structures for German RMBS transactions can be divided into unfunded, partially funded, or fully funded structures. The key driver for this type of structure is capital and risk relief. Unfunded Structures Unfunded structures normally take the form of credit default swaps or guarantees. A number of these have been executed in the German market. In this type of structure, the mortgage lender enters into a swap with a counterparty, typically an OECD bank. This counterparty makes payments to the lender to the extent certain losses occur on a defined pool of mortgage loans, commonly known as the reference pool. Partially Funded Structures As the name suggests, these structures combine an unfunded element, in the form of a credit default swap, with a funded element, in the form of notes. These notes are issued either by the bank directly, or via an SPE. In both cases, the notes are backed by appropriately rated collateral or are guaranteed by an appropriately rated counterparty. Fully Funded Structures These structures are fully funded, with the notes issued either by the bank directly, or via an SPE. In both cases, the notes are backed by appropriately rated collateral or are guaranteed by an appropriately rated counterparty. Table 1 Basic Features of True Sale and Synthetic RMBS vs. Pfandbriefe Transactions True sale Synthetic Assets Assets transferred to an SPE Defined pool of reference assets and a defined notion of losses Nature of the assets RMBS Hypotheken Pfandbriefe Assets within a cover register (Deckungsstock) Residential mortgage loans Residential mortgage loans Principally residential and commercial mortgage loans up to 60% lendable value (Beleihungswert), as defined by the Mortgage Banking Act (Hypothekenbank Gesetz) and associated rulings Issuer SPE SPE or a sufficiently rated bank or any bank with certain collateral arrangements Funding Fully funded to match the pool of assets Unfunded, partially funded, or fully funded based on the obligation of the rated bank or collateral arrangements Balance-sheet treatment Principal and interest payments Criteria Structured Finance RMBS: Criteria for Rating German Residential Mortgage-Backed Securities Generally designed for off-balance-sheet treatment Generally designed for off-balance-sheet treatment From the pool of segregated assets From the issuing bank or the collateral securing the funded elements Mortgage bank or Landesbank Fully funded and supported by assets in the cover register On-balance-sheet design Assets of the cover register www.standardandpoors.com/ratingsdirect 3 867630 | 300323561
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Traditional True Sale Structures<br />
Few <strong>German</strong> RMBS transactions to date are structured as traditional true sale transactions. This involves the sale of<br />
a pool of residential mortgage loans to a bankruptcy-remote special-purpose entity (SPE), which then issues a<br />
number of tranches of rated notes. The key drivers <strong>for</strong> these types of structures are fundraising, balance-sheet<br />
management, and risk management.<br />
Synthetic Structures<br />
Synthetic structures <strong>for</strong> <strong>German</strong> RMBS transactions can be divided into unfunded, partially funded, or fully funded<br />
structures. The key driver <strong>for</strong> this type of structure is capital and risk relief.<br />
Unfunded Structures<br />
Unfunded structures normally take the <strong>for</strong>m of credit default swaps or guarantees. A number of these have been<br />
executed in the <strong>German</strong> market. In this type of structure, the mortgage lender enters into a swap with a<br />
counterparty, typically an OECD bank. This counterparty makes payments to the lender to the extent certain losses<br />
occur on a defined pool of mortgage loans, commonly known as the reference pool.<br />
Partially Funded Structures<br />
As the name suggests, these structures combine an unfunded element, in the <strong>for</strong>m of a credit default swap, with a<br />
funded element, in the <strong>for</strong>m of notes. These notes are issued either by the bank directly, or via an SPE. In both cases,<br />
the notes are backed by appropriately rated collateral or are guaranteed by an appropriately rated counterparty.<br />
Fully Funded Structures<br />
These structures are fully funded, with the notes issued either by the bank directly, or via an SPE. In both cases, the<br />
notes are backed by appropriately rated collateral or are guaranteed by an appropriately rated counterparty.<br />
Table 1<br />
Basic Features of True Sale and Synthetic RMBS vs. Pfandbriefe Transactions<br />
True sale Synthetic<br />
Assets Assets transferred to an SPE Defined pool of reference assets and<br />
a defined notion of losses<br />
Nature of the<br />
assets<br />
RMBS Hypotheken Pfandbriefe<br />
Assets within a cover register<br />
(Deckungsstock)<br />
<strong>Residential</strong> mortgage loans <strong>Residential</strong> mortgage loans Principally residential and commercial<br />
mortgage loans up to 60% lendable value<br />
(Beleihungswert), as defined by the<br />
<strong>Mortgage</strong> Banking Act (Hypothekenbank<br />
Gesetz) and associated rulings<br />
Issuer SPE SPE or a sufficiently rated bank or<br />
any bank with certain collateral<br />
arrangements<br />
Funding Fully funded to match the pool of assets Unfunded, partially funded, or fully<br />
funded based on the obligation of the<br />
rated bank or collateral<br />
arrangements<br />
Balance-sheet<br />
treatment<br />
Principal and<br />
interest payments<br />
<strong>Criteria</strong> Structured Finance RMBS: <strong>Criteria</strong> <strong>for</strong> <strong>Rating</strong> <strong>German</strong> <strong>Residential</strong> <strong>Mortgage</strong>-Backed Securities<br />
Generally designed <strong>for</strong> off-balance-sheet<br />
treatment<br />
Generally designed <strong>for</strong><br />
off-balance-sheet treatment<br />
From the pool of segregated assets From the issuing bank or the<br />
collateral securing the funded<br />
elements<br />
<strong>Mortgage</strong> bank or Landesbank<br />
Fully funded and supported by assets in the<br />
cover register<br />
On-balance-sheet design<br />
Assets of the cover register<br />
www.standardandpoors.com/ratingsdirect 3<br />
867630 | 300323561
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