Criteria Structured Finance RMBS: Updated Assumptions For Liquidation Timelines In The U.S. Residential Mortgage Market.

Transcription

1 April 13, 2012 Criteria Structured Finance RMBS: Updated Assumptions For Liquidation Timelines In The U.S. Residential Primary Credit Analyst: Jack Kahan, New York (1) ; Analytical Managers, U.S. RMBS: Sharif Mahdavian, New York (1) ; Jeremy Schneider, New York (1) ; Vandana Sharma, New York (1) ; Global RMBS Criteria Officer: Nancy Chu, New York (1) ; Table Of Contents I. SCOPE OF THE CRITERIA II. IMPACT ON OUTSTANDING RATINGS III. EFFECTIVE DATE AND TRANSITION IV. ASSUMPTIONS Liquidation Timelines V. RELATED CRITERIA AND RESEARCH 1

2 Criteria Structured Finance RMBS: Updated Assumptions For Liquidation Timelines In The U.S. Residential Mortgage Market (Editor's Note: This criteria article supplements and partially supersedes "Outlook Assumptions For The U.S. Residential," published Dec. 22, This criteria article also partially supersedes "Methodology For Surveilling U.S. RMBS Reverse Mortgage Transactions," published Aug. 25, 2010; "U.S. RMBS Nonconforming (Jumbo) Reverse Mortgage Analysis Assumptions Revised," published March 20, 2008; and "Criteria Methodology And Assumptions: U.S. RMBS HECM Reverse Mortgage Analysis Assumptions Revised," published April 11, 2008, specifically those sections and appendices referring to foreclosure timelines.) 1. Standard & Poor's Ratings Services is updating its assumptions for liquidation timelines in the U.S. residential mortgage market. We are publishing this article to help market participants better understand our approach to reviewing U.S. residential mortgage-backed securities (RMBS), which we describe in "Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans," published Sept. 10, 2009 (U.S. RMBS Criteria). We periodically update our market outlook and assumptions in response to changes in the housing market. 2. This criteria article supplements and partially supersedes "Outlook Assumptions For The U.S. Residential Mortgage Market," published Dec. 22, This criteria article also partially supersedes "Methodology For Surveilling U.S. RMBS Reverse Mortgage Transactions," published Aug. 25, 2010; "U.S. RMBS Nonconforming (Jumbo) Reverse Mortgage Analysis Assumptions Revised," published March 20, 2008; and "Criteria Methodology And Assumptions: U.S. RMBS HECM Reverse Mortgage Analysis Assumptions Revised," published April 11, 2008, specifically those sections and appendices referring to foreclosure timelines. This article is also related to "Principles Of Credit Ratings," published Feb. 16, I. SCOPE OF THE CRITERIA 3. The updated liquidation timeline assumptions apply to new issue U.S. RMBS transactions backed by prime, Alternative-A (Alt-A), and subprime mortgage collateral, as well as those backed by nonperforming loans, reverse mortgages, and tax liens. II. IMPACT ON OUTSTANDING RATINGS 4. The updated assumptions are not expected to affect outstanding ratings because, in general, our loss severity assumptions for outstanding ratings reflect observed loss severities that already consider longer liquidation timelines. III. EFFECTIVE DATE AND TRANSITION 5. These criteria are effective immediately for all new U.S. RMBS transactions. 2

3 IV. ASSUMPTIONS 6. Standard & Poor's base-case loss projections for newly originated loans explicitly capture its current market outlook, as well as underwriting trends and the originated loans' quality. Our base-case assumptions generally equate to a 'B' rating. We periodically publish our market outlook and the impact that any changes to our outlook may have on base-case losses, as well as losses under more stressful economic conditions. 7. While our base-case assumptions at lower rating levels ('BB+' and lower) may reflect our current view of the housing market and general economic conditions, our projected losses for investment-grade ratings would generally not be affected unless we increase our base-case losses to levels that reflect a more moderate level of economic stress. For further information on how changes to market conditions affect our rating decisions, see the "How Changes In The Markets Impact Our Rating Decisions" section (paragraphs 26-31) in our U.S. RMBS Criteria. 8. Standard & Poor's most recently published its outlook on the housing market and the impact of that outlook on base-case losses in December 2011 (see "Outlook Assumptions For The U.S. Residential," published Dec. 22, 2011). At that time, we confirmed our 0.5% assumption for base-case projected losses on an "archetypical" pool. The RMBS Criteria define an archetypical pool as consisting of newly originated, fully underwritten, and fully amortizing fixed-rate loans to prime borrowers. The archetypical pool is collateralized by single-family detached primary residences with loan-to-value ratios of 75%. For more information on an archetypical pool, see paragraph 24 of the U.S. RMBS Criteria. 9. Our view in December 2011 was that although housing prices were likely to drop another 5% 7%, our assumption for a 30% market value decline underlying the 0.5% base-case loss for the archetypical pool was still appropriate and, therefore, we confirmed our 0.5% base-case loss projection. Our view on the housing market in general has not changed, but we are updating our assumptions for liquidation timelines due to the continued lengthening of these timelines in many states. These updated assumptions slightly increase our base-case projected losses for an archetypical pool. However, the increase is not substantial and is still within our tolerance level for confirming our 0.5% base-case loss. 10. In addition to considering our current market outlook in our projected losses, we may also make transaction-specific qualitative adjustments to the degree and timing of projected losses to reflect our view of the strengths and weaknesses in a particular originator's current origination and/or underwriting guidelines (see "Standard & Poor's Updates Mortgage Originator And Underwriting Review Criteria For U.S. RMBS," published May 5, 2010), or to address unusual loan or pool characteristics (see paragraph 16 of the U.S. RMBS Criteria). Based on the collateral's historical performance or our assessment of potential risk, consideration may also be given to refinance loans, borrowers with verified assets, loan modifications, borrowers in bankruptcy, seasoned loans, servicer advancing practices, outstanding servicer advances, loan original term, updated property valuations, borrower concentration, and market value declines. Our view of these loans or loan characteristics does not change our archetypical base-case loss projection because we view the effect of these characteristics to be transaction-specific. As applicable, our view on these characteristics will be articulated in the related transaction rationale. 3

4 Liquidation Timelines 11. As mentioned above, Standard & Poor's has observed an increase in the time it takes to liquidate a defaulted loan in many states. In our view, the liquidation timeline for a loan includes three stages: pre-foreclosure (delinquency), foreclosure, and real estate owned (REO). Our foreclosure timeline and REO assumptions are each a function of the state in which the property is located. We are recalibrating the state-specific base-case assumptions for each state to reflect increasing liquidation timelines. Research has shown an average increase in U.S. residential liquidation timelines to 25 months from 23 months and, therefore, we are increasing our base-case assumptions by an average of two months. These average liquidation timeline observations assume an equal weighting between states. For each state, the assumptions for foreclosure and REO timelines are based on a four-year average of observed months in foreclosure and REO. 12. Our updated assumptions reflect the fact that certain states' liquidation timelines have become substantially different than our current assumptions, though the base-case timeline increase, on average, is not substantial. At this time, our average 'AAA' liquidation timeline assumptions remain unchanged because we do not view the average two-month increase to be substantial. We do not expect our 'AAA' assumptions to change unless our base-case foreclosure timeline projections continue to lengthen and approach our 'AAA' assumptions. We will, however, continue to monitor liquidation timelines and may update our assumptions to reflect current trends in the market. The remaining assumptions for liquidation timelines for each state at each rating level are linearly interpolated between a state's anchored 'AAA' timeline and its updated 'B' timeline. Our additional liquidation timelines of two months for two- to four-family homes and three months for condo or co-op properties at each rating level remain the same. (See the table for our updated state-level liquidation timeline assumptions.) Updated State-Level Liquidation Timeline Assumptions State Base-case ('B') liquidations (mos.) Stressed-case ('AAA') liquidations (mos.) AK AL AR AZ CA CO CT DC DE FL GA GU HI IA ID IL IN KS KY

5 Updated State-Level Liquidation Timeline Assumptions (cont.) LA MA MD ME MI MN MO MS MT NC ND NE NH NJ NM NV NY OH OK OR PA PR RI SC SD TN TX UT VA VI VT WA WI WV WY V. RELATED CRITERIA AND RESEARCH Outlook Assumptions For The U.S. Residential, published Dec. 22, Principles Of Credit Ratings, published Feb. 16, Methodology For Surveilling U.S. RMBS Reverse Mortgage Transactions, published Aug. 25, Standard & Poor's Updates Mortgage Originator And Underwriting Review Criteria For U.S. RMBS, published May 5,

6 Methodology and Assumptions for Rating U.S. RMBS Prime, Alternative-A, and Subprime Loans, published Sept. 10, Criteria Methodology And Assumptions: U.S. RMBS HECM Reverse Mortgage Analysis Assumptions Revised, published April 11, U.S. RMBS Nonconforming (Jumbo) Reverse Mortgage Analysis Assumptions Revised, published March 20, These criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Their use is determined by issuer- or issue-specific attributes as well as Standard & Poor's Ratings Services' assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment. 6

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