S&P: Various Rating Actions Taken On 52 Classes From 28 U. S. RMBS Transactions Due To Interest Shortfalls
All of the transactions in this review are backed by a mix of fixed - and adjustable-rate loans secured primarily by one - to four-family residential properties.
A combination of subordination, overcollateralization (when available), excess interest, and bond insurance (as applicable) provide credit enhancement for all of the tranches in this review. Where the bond insurer is no longer rated, we solely relied on the underlying collateral's credit quality and the transaction structure to derive the ratings.
APPLICATION OF INTEREST SHORTFALL CRITERIAIn reviewing these ratings, we applied our interest shortfall criteria, "Structured Finance Temporary Interest Shortfall Methodology," Dec. 15, 2015, which impose a maximum rating threshold on classes that have incurred interest shortfalls resulting from credit or liquidity erosion. In applying the criteria, we looked to reimbursement provisions within each payment waterfall for the applicable class to determine whether the reimbursement must be made immediately. In instances where immediate reimbursement is required, we used the maximum length of time until full interest is reimbursed as part of our analysis.
In instances where reimbursement may be delayed by other factors within the payment waterfall, we used our cash flow projections in determining the likelihood that the shortfall would be reimbursed under various scenarios.
DOWNGRADESThe downgrades include three ratings that were lowered three or more notches. One of the lowered ratings remained at an investment-grade level, while the remaining 44 downgraded classes already had speculative-grade ratings. For those classes that feature delayed reimbursement provisions, we projected the transactions' cash flows to assess the likelihood of the interest shortfalls' reimbursement.
ECONOMIC OUTLOOKWhen 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 4.8% in 2016;Real GDP growth of 2.0% for 2016;The inflation rate will be 2.2% in 2016; andThe 30-year fixed mortgage rate will average about 3.7% in 2016.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:Total unemployment will tick up to 4.9% for 2016;Downward pressure causes GDP growth to fall to 1.8% in 2016;Home price momentum slows as potential buyers are not able to purchase property; andWhile the 30-year fixed mortgage rate remains a low 3.7% in 2016, limited access to credit and pressure on home prices will largely prevent consumers from capitalizing on these rates.