S&P projects stable 2006
By MortgageDaily.com staff
2/7/2006

Performance of residential mortgage-backed securities will remain stable this year despite what one ratings agency calls the proliferation of affordability mortgage products in a softening real estate market.

Standard & Poor's said an improved outlook was conveyed at last week's annual American Securitization Forum in Las Vegas.

S&P credit analyst Ernestine Warner says she has started to see the effect that negative amortizing features can have on a transaction, specifically by way of increased subordinate bond sizes. While this may be interpreted as a positive sign of increased credit enhancement, Warner said she believes it should be serve as an indication that increased losses may occur farther down the road.

For 2006, however, S&P anticipates continued strong performance for rated RMBS. This sentiment was echoed by many other panels, S&P said, noting that the "overall tone at the conference supported the premise that the industry's concerns regarding the housing market have not materialized."

"We have noticed minor changes in the credit quality of newer vintages, particularly in FICO and LTV," said S&P credit analyst Susan Barnes. "However, because our analysis involves loan-level modeling, we can pick up on those nuances and build in the appropriate credit support. The only concerns we have pertain to whether originators have the ability to originate and cause poor credit quality in a way that can't be captured through our modeling."

The loan-level analysis and modeling efforts, performed at the time of origination, reportedly allow S&P to adequately address risks in transactions that may include loans from less creditworthy borrowers and have been the foundation for historic high quality ratings. In 2005, RMBS ratings had a stability ratio above 99.5%, according to the announcement.

"The surveillance process relies heavily on precise loan-level analysis at issuance, which means that all major risks have been identified and addressed, including the inclusion of newer, affordability products," Warner said. "Due to the right-sized analysis at the time of securitization, our review process last year yielded predominantly affirmations and upgrades. So the quality of the ratings at issuance is again clearly verified by the 2005 stability ratio."

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