Various Rating Actions Taken On 92 Classes From 13 U.S. RMBS Transactions

Stocks and Financial Services Press Releases Thursday January 19, 2017 08:54
CENTENNIAL--19 Jan--S&P Global Ratings

CENTENNIAL (S&P Global Ratings) Jan. 18, 2017--S&P Global Ratings today completed its review of 92 classes from 13 U.S. residential mortgage-backed securities (RMBS) transactions issued between 2002 and 2004. The review yielded 18 upgrades, nine downgrades, and 65 affirmations. The transactions in this review are backed by a mix of fixed- and adjustable-rate prime jumbo mortgage loans, which are secured primarily by first liens on one- to four-family residential properties.

With respect to insured obligations, where we maintain a rating on the bond insurer that is lower than what we would rate the class without bond insurance, or where the bond insurer is not rated, we relied solely on the underlying collateral's credit quality and the transaction structure to derive the rating on the class.

Of the classes reviewed, the following are insured by an insurance provider that is currently rated by S&P Global Ratings:
Prime Mortgage Trust 2003-3's class A-6 ('AA+ (sf)'), insured by MBIA Insurance Corp. ('CCC'); and
RFMSI Series 2003-S20 Trust's class I-A-5 ('AA (sf)'), insured by Assured Guaranty Municipal Corp. ('AA').

Some of the rating actions reflect the application of our interest-only (IO) criteria (see "Global Methodology For Rating Interest-Only Securities," published April 15, 2010), which provide that we will maintain the current ratings on an IO class until all of the classes that the IO security references are either lowered to below 'AA- (sf)' or have been retired--at which time we will withdraw the ratings on these IO classes. The ratings on each of these classes have been affected by recent rating actions on the reference classes upon which their notional balances are based.

A criteria interpretation for the above mentioned criteria was issued to clarify that when the criteria state "we will maintain the current ratings," it means that we will maintain active surveillance of these IO classes using the methodology applied prior to the release of this criteria.

ANALYSIS
Analytical Considerations

We incorporate various considerations into our decisions to raise, lower, or affirm ratings when reviewing the indicative ratings suggested by our projected cash flows. These considerations are based on transaction-specific performance or structural characteristics (or both) and their potential effects on certain classes.

UPGRADES

Our projected credit support for the affected classes is sufficient to cover our projected losses for these rating levels. The upgrades reflect improved collateral performance/delinquency trends, a decrease in the constant prepayment rate (CPR), and/or increased credit support relative to our projected losses. The upgrades include nine ratings that were raised three or more notches.

The upgrades on class A-1 from Structured Asset Mortgage Investments Trust 2002-AR2; classes 1-A1, 4-A, and B-1 from Structured Asset Securities Corp. series 2003-15A; and classes I-A and III-A from Structured Asset Mortgage Investments II Trust 2004-AR2 reflect a decrease in our projected losses for the related transactions and our belief that our projected credit support for the affected classes will be sufficient to cover our revised projected losses at these rating levels. We have decreased our projected losses because there have been fewer reported delinquencies for the associated pools during the most recent performance periods compared with those reported during previous reviews.

Structured Asset Mortgage Investments Trust 2002-AR2's severe delinquencies in collateral group one decreased to 13.2% in November 2016 from 15.4% in November 2015. Structured Asset Securities Corp. series 2003-15A's severe delinquencies decreased to 4.6% in November 2016 from 10.0% in November 2014. Structured Asset Mortgage Investments II Trust 2004-AR2's severe delinquencies in group one decreased to 6.0% in November 2016 from 12.0% in November 2014, and group three severe delinquencies decreased to 15.0% in November 2016 from 19.9% in November 2014. Severe delinquencies referenced above are defined as any loan that is 60-plus days delinquent, in foreclosure or real estate-owned status, or in bankruptcy.

The upgrades on class A-2 from Structured Asset Mortgage Investments Trust 2002-AR2, classes B8, B9, B10, and B11 from RESI Finance Ltd. Partnership 2003-A, and classes I-A-2, I-A-3, III-A-1, III-A-2, and III-A-4 from Wells Fargo Mortgage-Backed Securities 2003-N Trust are because of an increase in credit support available to each class due to a larger allocation of unscheduled principal to more senior classes than junior classes. As a result, these classes were able to withstand loss stresses at higher rating scenarios.

The upgrades on classes A-2B and B-1 from Merrill Lynch Mortgage Investors Trust Series MLCC 2004-C reflect a decrease in the underlying pool's CPR. The reduced CPR has lowered unscheduled principal payments to the more subordinate classes in this transaction, which results in extending their lives and preserving the projected credit support to the affected senior classes that may be needed for back-end losses.

We raised our rating on class B1 from Structured Asset Securities Corp. series 2003-15A to 'B (sf)' from 'CCC (sf)' because we believe this class is no longer vulnerable to default.
DOWNGRADES

The downgrades include two ratings that were lowered three or more notches. We lowered our ratings on three classes to speculative-grade ('BB+' or lower) from investment-grade ('BBB-' or higher), while the remaining six downgraded classes already had speculative-grade ratings. The downgrades reflect our belief that our projected credit support for the affected classes will be insufficient to cover our projected losses for the related transactions at a higher rating. The downgrades reflect either tail risk or principal writedowns.

We lowered our ratings on classes II-M-1, II-M-2, II-M-3, and II-B-1 from RFMSI Series 2003-S20 Trust to 'D (sf)' because of principal writedowns incurred by these classes in recent remittance periods.
Tail Risk

RFMSI Series 2003-S20 Trust and First Horizon Mortgage Pass-Through Trust 2004-AR2 are backed by a small remaining pool of mortgage loans. We believe that pools with less than 100 loans remaining create an increased risk of credit instability because a liquidation and subsequent loss on one loan, or a small number of loans, at the tail end of a transaction's life may have a disproportionate impact on a given RMBS tranche's remaining credit support. We refer to this as tail risk.

We addressed the tail risk on classes I-A-9 and II-A-1 from RFMSI Series 2003-S20 Trust and classes III-A-1 and IV-A-1 from First Horizon Mortgage Pass-Through Trust 2004-AR2 by conducting a loan-level analysis that assesses this risk, as set forth in our tail risk criteria. Today's rating actions on these classes reflect the application of our tail risk criteria.

AFFIRMATIONS

The affirmations of ratings in the 'AAA' through 'B' rating categories reflect our opinion that our projected credit support on these classes remained relatively consistent with our prior projections and is sufficient to cover our projected losses for those rating scenarios.

For certain transactions, we considered specific performance characteristics that, in our view, could add volatility to our loss assumptions and, in turn, to the ratings suggested by our cash flow projections. When our model recommended an upgrade, we either limited the extent of our upgrade or affirmed our ratings on those classes to account for this uncertainty and promote ratings stability. In general, these classes have one or more of the following characteristics that limit any potential upgrade:

Insufficient subordination, overcollateralization, or both;
Delinquency trends;
Historical interest shortfalls; and/or
Low priority in principal payments.

In addition, some of the transactions have failed their delinquency triggers, resulting in reduced--or a complete stop of--unscheduled principal payments to their subordinate classes. However, these transactions allow for unscheduled principal payments to resume to the subordinate classes if the delinquency triggers begin passing again. This would result in eroding the credit support available for the more senior classes. Therefore, we affirmed our ratings on certain classes in these transactions even though these classes may have passed at higher rating scenarios.

The ratings affirmed at 'CCC (sf)' or 'CC (sf)' reflect our belief that our projected credit support will remain insufficient to cover our 'B' expected case projected losses for these classes. Per "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Oct. 1, 2012, the 'CCC (sf)' affirmations reflect our view that these classes are still vulnerable to defaulting, and the 'CC (sf)' affirmations reflect our view that these classes remain virtually certain to default.

ECONOMIC OUTLOOK

When determining a U.S. RMBS collateral pool's relative credit quality, our loss expectations stem, to a certain extent, from our view of how the loans will behave under various economic conditions. S&P Global Ratings' baseline macroeconomic outlook assumptions for variables that we believe could affect residential mortgage performance are as follows:

An overall unemployment rate of 4.9 % in 2016, dipping to 4.6% in 2017;
Real GDP growth of 1.6 % for 2016 and 2.4% in 2017;
The inflation rate will be 2.2% in both 2016 and 2017; and
The 30-year fixed mortgage rate will average about 3.6 % in 2016, rising to 4.1% in 2017.

Our outlook for RMBS is stable. Although we view overall housing fundamentals positively, we believe RMBS fundamentals still hinge on additional factors, such as the ultimate fate of modified loans, the propensity of servicers to advance on delinquent loans, and liquidation timelines.

Under our baseline economic assumptions, we expect RMBS collateral quality to improve. However, if the U.S. economy were to become stressed in line with S&P Global Ratings' downside forecast, we believe that U.S. RMBS credit quality would weaken. Our downside scenario reflects the following key assumptions:

The unemployment rate will remain at 4.9% for 2016 and inch up to 5.0% in 2017;
Downward pressure causes GDP growth to fall to 1.5 % in 2016 and to 1.4% in 2017;
Home price momentum slows as potential buyers are not able to purchase property; and
While the 30-year fixed mortgage rate remains a low 3.6% in 2016 and 2017, limited access to credit and pressure on home prices will largely prevent consumers from capitalizing on these rates.

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