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

Table 1
Basic Features of True Sale and Synthetic RMBS vs. Pfandbriefe Transactions (cont.)
Cash flow analysis Detailed cash flow analysis to ensure the
payments from pool of assets are sufficient
to maintain payments of interest and
principal on the rated debt in a recessionary
environment
Maturity of the
transaction
Criteria Structured Finance RMBS: Criteria for Rating German Residential Mortgage-Backed Securities
Dependent on the maturity of the
underlying assets
The General Rating Process
Rated collateral usually tailored to
provide cash flows as required.
Interest subparticipation might
require separate cash flow modeling
Potentially part of the transaction
definitions
Detailed cash flow analysis addressing the
dynamic nature of the asset pool
Usually shorter than the underlying assets,
but still dependent on the asset
characteristics
Standard & Poor's assesses the interaction of structural, legal, and credit quality features in a transaction, and tests
the robustness of these qualities using various assumptions appropriate for the rating sought. The conservatism of
the assumptions reflects the level of the rating. In most cases, the rating process includes the following steps:
• An initial meeting is held to discuss the asset characteristics, structure, data requirements, and the time schedule.
With respect to data requirements, Standard & Poor's asks the originators to supply specific information on each
loan in a standardized data template (available on request). The data requested includes items such as loan
balance, property value, etc.
• A one-day visit (corporate overview) is conducted to review the underwriting, servicing, and collection policies
and procedures of the originator (and a servicer if a different entity is employed) of the mortgage loans. A sample
agenda can be found in Appendix 1. Typically, managers (Abteilungsleiter) give presentations on the topics
outlined in the agenda. These topics are crucial to the rating analysis of the mortgage loans to be securitized.
Standard & Poor's will endeavor to allocate native German-speaking primary analysts to German transactions.
Therefore, these presentations can be conducted in German.
• The credit quality of the underlying loan is determined, thereby yielding the credit enhancement levels before any
cash flow analysis. This risk analysis takes into account the results of the servicer review and the credit analysis of
the underlying mortgage loan portfolio (see Foreclosure Frequency Assumptions below). In true sale transactions
and some funded synthetic transactions, final credit enhancement levels are determined after a cash flow analysis
(see Loss Severity Assumptions).
• There is a review of and comments are made on the draft transaction documents and legal opinions. Arranging
banks typically print and distribute the preliminary offering circular at this stage and Standard & Poor's typically
issues a presale report and assigns preliminary ratings to the transaction. Shortly before the close of the
transaction a final credit committee will examine whether the prerequisites for a final rating are fulfilled, and
whether any outstanding issues have been satisfactorily resolved.
• Following the release of the final rating letter, the transaction will be transferred to the surveillance department.
This department is responsible for the ongoing monitoring of the transaction.
Credit Analysis
The credit quality of German mortgage pools is assessed by estimating the credit risk associated with each loan in
the pool. The aggregate of this risk is then calculated to assess the overall credit quality of the pool. The credit risk
associated with each loan in the pool is quantified by estimating each loan's probability of default leading to
foreclosure and its loss severity (the loss that would be realized as a result of foreclosure).
Standard & Poors | RatingsDirect on the Global Credit Portal | August 31, 2001 4
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