S&P: Various Rating Actions Taken On 19 U. S. RMBS Transactions
ANALYSISAnalytical ConsiderationsWe 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.
UPGRADESThe upgrades include 18 ratings that were raised three or more notches. Our projected credit support for the affected classes is sufficient to cover our projected losses for these rating levels. The upgrades reflect one or more of the following:Improved collateral performance/delinquency trends;Increased credit support relative to our projected losses; and/orThe class' expected short duration. We raised our ratings on seven classes from 'CCC (sf)' because we believe these classes are no longer vulnerable to default. We also raised six ratings to 'CCC (sf)' and one to 'B - (sf)' from 'CC (sf)' because we believe these classes are no longer virtually certain to default, primarily owing to the improved performance of the collateral backing this transaction. However, the 'CCC (sf)' ratings indicate that we believe that our projected credit support will remain insufficient to cover our projected losses for these classes and that the classes are still vulnerable to defaulting.
DOWNGRADESOf the four downgrades, two of the lowered ratings remained at an investment-grade level, while the remaining two 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 deteriorated credit performance trends and/or decreased credit support.
The downgrades on classes A1 and A5 from Structured Asset Securities Corporation Mortgage Loan Trust 2007-BC2 reflect the impact of the failure of the transaction's cumulative loss trigger, resulting in permanent sequential principal payments to all classes. These classes will now be locked out from receiving principal payments until the more senior classes have been paid down to zero, extending these subordinate classes' lives and making them more susceptible to back-end losses.
The downgrades on class A3 from Structured Asset Investment Loan Trust 2004-3 and class A3 from Structured Asset Investment Loan Trust 2004-6 reflect the impact of the passing of the payment allocation triggers, allowing principal payments to be made to more subordinate classes, eroding projected credit support for the affected senior classes.
AFFIRMATIONSThe 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; orLow 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.
DISCONTINUANCESWe discontinued our ratings on two classes that were paid in full during recent remittance periods.
We discontinued three 'D (sf)' ratings on classes with zero balances. These classes have been written down to zero as a result of realized losses that remain outstanding. We discontinued these ratings according to our surveillance and withdrawal policy, as we view a subsequent upgrade to a rating higher than 'D (sf)' to be unlikely under the relevant criteria.
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.