WASHINGTON, April 17 /PRNewswire-USNewswire/ -- In testimony today before the Senate Banking, Housing and Urban Affairs Committee's Securities, Insurance and Investment Subcommittee, Susan Barnes, Managing Director of Standard & Poor's Ratings Services, detailed S&P's process for rating mortgage securities backed by subprime mortgage loans and commented on the impact of current mortgage loan delinquencies and defaults on the performance of such RMBS transactions.
"S&P actively monitors trends in the housing market, the mortgage finance market, consumer credit and the economy to ensure that our models, methodologies, criteria and analysis ... are fully informed," said Ms. Barnes. She also explained Standard & Poor's rigorous process for rating RMBS transactions which includes: an analysis of every loan, a simulation of the cash flow generated by each deal, a review of originator and servicer operational procedures, review of the transactional documents for legal and structural provisions, and a surveillance process that allows S&P to monitor the ongoing performance of subprime mortgages included in subprime RMBS.
Ms. Barnes explained that through S&P's loan analysis process, "Early in 2006, Standard & Poor's was able to identify the deteriorating credit quality of the mortgage loans in 2006 vintage RMBS, and adjusted its rating criteria to increase the credit enhancement requirements necessary to maintain a given rating. Credit enhancement requirements for the average subprime transaction rated in 2006 increased by 50% as compared to deals from 2005."
Commenting on the impact of the current subprime situation on the credit quality of RMBS transactions, Ms. Barnes said, "While delinquencies for the 2006 vintage are much higher than what the market has experienced in recent years, they are not atypical of past long-term performance of the RMBS market, such as the delinquencies reported for the 2000 vintage after similar seasoning." Ms. Barnes indicated that Standard & Poor's expects to see losses in subprime mortgage loans contained in 2006 vintage residential mortgage backed securities (RMBS) of approximately between 5.25% and 7.75%.
"Due to minor home price declines in 2007, we expect losses, and consequently negative rating actions, to keep increasing in the near-term relative to previous years," Ms. Barnes said. "However, as long as interest rates and unemployment remain at historical lows, and income growth continues to be positive, there is sufficient protection for the majority of investment grade bonds. As of April 12, 2007, only 0.3% of the outstanding ratings in the subprime area have been downgraded or placed on CreditWatch."
Ms. Barnes also noted that Standard & Poor's views loss mitigation efforts (such as forbearance and loan restructuring) as an important part of servicing securitized mortgage loans. "If a large percentage of mortgage loans go into default and foreclosure, the principal amount of losses may be greater than the losses that would result from forbearance or restructuring the mortgage loans," she said. "Regardless, so long as forbearance and restructuring of the subprime mortgage loans is consistent with industry standards, S&P believes that the ratings on the RMBS will not be negatively affected."
Ms. Barnes' full Senate testimony, as well as additional commentary by S&P on this topic, can be found at Standard & Poor's public website, http://www.standardandpoors.com/, as well as RatingsDirect.
About Standard & Poor's
Standard & Poor's, a division of The McGraw-Hill Companies , is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. With approximately 8500 employees located in 21 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit http://www.standardandpoors.com/.
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