RMBS reading

Question 0

Level of credit enhancements accords with:

Answer 0

accords with losses that may arise in a housing loan portfolio under stress scenarios commensurate with the relevant rating levels.

Question 1

WHat would cause a deterioration in housing loans underlying RMBS (3)

Answer 1

1. higher HH indebtedness
2. higher living costs
3. stronger property price appreciation
   … leading to a property price correction

Question 2

RMBS criteria

Answer 2

1. Establish AAA estimated loss and credit enhancement level as an anchor point for archetypical pool at 5%
2. Define archetypical pool
3. Calibrate credit enhancement levels at ratings consistent with AAA
4. Incorporate current view and outlook on the housing and credit markets into expected loss
5. Introduce credit enhancement floor of 4% at AAA and 0.35% at B
6. Update credit enhancement adjustment factors applied to differentiate risks in actual mortgage pools relative to archetypical pool
7. Estimated loss projection methods for surveillance

Question 3

RMBS global rating - differences due to:

Answer 3

1. composition of archetypical pool, reflecting housing loan product and market differences
2. AAA anchor point for the archetypical pool, which is 5% for AUstralia and 7.5% for US

Question 4

RMBS criteria framework methodology

Answer 4

1. Anchor the AAA rating credit enhancement through normal business cycle
2. Vary the credit enhancement at the B rating level based on S&P view / outlook of housing / credit markets
3. Calibrate the credit enhancement levels for other ratings between AAA and B
4. Criteria applied to the RMBS at issue and through the life, so need to monitor losses at loan level as well as performance based loss projections.

Question 5

Why is there a difference between Australian AAA anchor point of 5% and US anchor point of 7.5%

Answer 5

• AUs law allows for full recourse to borrowers on residential mortgages; thereby limits the decision to default on affordability factors rather than owner’s equity in property
• Aus legal environment is creditor friendly, stronger enforcement regime
• absence of tax deductions secured through owner occupier
• Lower risk features in Aus - at least one year of seasoning for originators with history < yrs
• originate to distribute model was popular in US but not Aus. Aus more closely aligned to the performance of the RMBS, as originator typically assumes several roles in the transaction

Question 6

List pool characteristics for Archetypical RMBS

Answer 6

• At least 250 mortgages
• PAYG employees, credit checked / clear history, not 1st home buyer, owner occupier
• 1st registered mortgage, 75% LTV, fully amortizing 30 year loan, seasonging >1 yr < 5 yr
• security: geographical diversity, full general insurance on property, max value $1m

Question 7

Can AAA be higher than the anchor point

Answer 7

Yes, if economic and market conditions deteriorate significantly beyond normal ranges