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

Table 3
Criteria Structured Finance RMBS: Criteria for Rating German Residential Mortgage-Backed Securities
Characteristics Affecting Base Foreclosure Frequency and Related Adjustment Guidelines
Description of characteristic Foreclosure frequency adjustment guidelines
Loan-to-value (LTV) < 55% Base multiplied by 0.8
LTV 55% to 80% Base multiplied by 1.0 (no change)
LTV > 80% Base multiplied by 1.1 to 3.0 according to a continuous function.
Indicative multiples at discrete LTV levels are given as follows:
85% LTV = base multiplied by 1.2
90% LTV = base multiplied by 1.6
95% LTV = base multiplied by 2.4
100% LTV = base multiplied by 3.0
Interest-only loans (endfaellige Darlehen) without satisfactory
additional collateral (term < 20 years)
Base multiplied by 1.67
Letting loans (fremdvermietete Objekte) Base multiplied by 1.5 to 1.8 and then added to base (e.g., for a base of 12%: base
multiplied by 1.67 = 20%; base plus 20% = 32%
Loan size > €400,000 or equivalent Increases by 1% to 20% of base (increases as loan size increases and caps when
loan size reaches €1,000,000)
Unacceptable geographic concentration Case-by-case consideration
Affordability not adequately assessed Case-by-case consideration
Completion date >18 months (with no arrears) Subtract 10% to 25% of base (increases as seasoning increases and caps when
seasoning reaches about 60 months)
Arrears Case-by-case consideration, based on arrears management and performance data
Loan-to-Value (LTV)
LTV is defined as the ratio of aggregate mortgage debt divided by the value of the property. This ratio has
historically been a key foreclosure predictor, with low LTV ratios associated with lesser probabilities of loan default.
A low LTV ratio indicates that a borrower has a high equity investment in a property, but can also indicate some
prior financial management.
Standard & Poor's ability to rely on LTV ratios is crucial, given that the LTV ratio is important in the estimation of
foreclosure frequency (and loss severity, see below). In general, securitized loans in Germany have benefited from
full property valuations. German mortgage lending banks typically have in-house valuation experts, with extensive
experience in the building and construction industry.
German banks normally use a material value method (Sachwertverfahren) or a return value method
(Ertragswertverfahren) to determine the value of a property. The resulting market valuation is then deducted by a
certain percentage to give a "lendable" value or Beleihungswert. Lenders use this reduction as potential coverage in
a forced sale situation. Typically, the less liquid the property is considered to be, the higher the deducted percentage
(or haircut) is from the property value. This approach stems from Mortgage Banking Act requirements for those
banks regulated by this act, but has also been adopted by nonmortgage banks.
In order to give benefit to this conservative valuation haircut, Standard & Poor's adjusts the lendable values in its
calculation of LTV ratios. Subsequent references to LTV in this article refer to this adjusted LTV. The degree of
uplift to the valuation depends on the transaction structure. In synthetic structures, where a minimum level of
haircut is stated in the eligibility criteria, and where all losses are audited prior to being allocated, Standard &
Poor's will typically re-engineer the valuation, giving full benefit to the haircut. The timing and comprehensiveness
of the audit will affect this analysis. In the case of true sale transactions, partial benefit is given, resulting in a
valuation that is below market value but in excess of the Beleihungswert.
Standard & Poors | RatingsDirect on the Global Credit Portal | August 31, 2001 6
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