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

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Criteria Structured Finance RMBS: Criteria for Rating German Residential Mortgage-Backed Securities Note that Standard & Poor's considers family homes with an attached rental flat to be owner-occupied and as such do not attract the additional foreclosure risk of a letting-only property. Loan Size Large loans are considered to have more inherent risk than smaller loans owing to the increased sensitivity of these borrowers to changes in their financial situation in times of recession. Jumbo loans are defined as loans with a balance of more than €400,000. This limit will be adjusted on an ongoing basis to reflect regional price differences. Geographic Concentration If a pool is not suitably diversified by region, a local economic downturn can adversely affect the losses in the mortgage pool. Standard & Poor's generally considers the effect of regional concentrations on foreclosure frequencies on a case-by-case basis. In this analysis, the proportion of the pool in each geographic area is compared with the population distribution of Germany as a whole. If they correspond approximately, typically no additional foreclosure risk will be assumed. Affordability Standard & Poor's will assess how the servicer calculates the borrower's long-term income available for loan repayment (frei verfügbares Einkommen, Kapitaldienstfähigkeit), and the frequency with which it updates averaged expense predictions based on borrower characteristics (Ausgabenpauschalen). Standard & Poor's may conclude that a borrower's financial ability to repay the loan may be compromised if these procedures are not deemed to be adequate, and will increase the foreclosure frequency accordingly. Seasoning Historical data indicates that the most likely period in which a borrower will default is the first five years following completion. A mortgage that has been outstanding for a significant period of time (and is not currently in arrears) is, therefore, considered to have a lower likelihood of foreclosure. Arrears Loans in arrears clearly have a greater propensity to go into foreclosure given their status. Standard & Poor's recognizes that collection efforts made by the lender will reduce the probability of foreclosure for loans in arrears. Standard & Poor's will also analyze the types of performing arrangements and arrears management procedures utilized by an originator, and consider originator-specific performance data and roll rates when sizing the foreclosure risks associated with loans in arrears. Second-Charge Mortgages Unlike in some other European jurisdictions (e.g., the U.K.), in Germany Standard & Poor's assumes no increase in the assumed foreclosure frequency for second mortgages. Multiple loans secured off one property is the norm in Germany and generally reflects market lending practices rather than additional borrowing to finance, for example, home improvements. Loss Severity Assumptions Loss severity is the estimated loss that will be realized on a defaulted loan. A loss is realized on a loan if the sale of the repossessed property does not cover the costs associated with enforcing the mortgage, the accrued interest on the loan during the foreclosure period, and the remaining loan balance. The loss severity is calculated by dividing this realized loss by the loan balance, expressed as a percentage. Standard & Poors | RatingsDirect on the Global Credit Portal | August 31, 2001 8 867630 | 300323561
Market Value Decline The rating analysis assumes that the sale proceeds received from a property are less than the original valuation of the property, owing to a recessionary market value decline. Standard & Poor's market value decline assumptions for German residential properties are shown in table 4. These market value declines are both rating and loan dependent. The tax incentives associated with rental properties can result in overly inflated prices for these types of properties. Standard & Poor's therefore assumes that a rental property will show a greater market value decline than an owner-occupied property. Table 4 Market Value Decline Assumptions Rating Standard market value declines (%) Letting loans market value declines (%) AAA 35 45 AA 30 40 A 26 36 BBB 22 32 Jumbo Valuations Properties with high valuations are assumed to experience higher loss severities owing to the smaller and less liquid market for these types of properties. A property with a valuation greater than €500,000 attracts a 1% to 20% increase in loss severity, which increases as the property valuation increases and caps at about €1,000,000. As with jumbo loan limits, this limit will be adjusted on a continuing basis to reflect regional price differences. Foreclosure Costs, Foreclosure Period, and Accrued Interest The fixed costs associated with foreclosure are assumed to be, on average, 6% of the loan balance for each defaulted loan. This figure includes all costs and fees resulting from the pursuit of arrears, litigation, administration, maintenance, and sale of the property. Where loss protection needs to be sized for the interest accrued during the foreclosure period (e.g., in some synthetic structures, and in true sale structures without a cash flow simulation), a 24-month foreclosure period and a stressed interest rate of 8% to 12% are assumed. Second Charge Mortgages Standard & Poor's loss severity calculations also account for prior-ranking mortgages not included in the securitization. The proceeds from the sale of the property are used to fulfill the prior-ranking obligation (including the loan balance, costs of foreclosure, and interest accrued during the foreclosure period) before they are used to cover the second charge securitized loan. Loss Severity Calculation Example An example of Standard & Poor's loss severity calculation for an individual loan is shown in table 5. Table 5 Criteria Structured Finance RMBS: Criteria for Rating German Residential Mortgage-Backed Securities 'AAA' Loss Severity Calculation for a First Ranking Loan, Assuming an LTV of 80% Original property value 100,000 Loan balance 80,000 Foreclosure proceeds 100,000 minus 'AAA' market value decline of 35% = 65,000 Gross loss 15,000 Realization costs 24 months accrued interest at 12% 19,200 Selling, legal and other costs at 6% 4,800 www.standardandpoors.com/ratingsdirect 9 867630 | 300323561
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