S&P: Rating Actions Taken On RMS Series 2007-1HE, RMS Series 2007-2H, RHG Securitisation Trust - Series 2006-1 Transactions
At the same time, we affirmed our 'AAA (sf)' ratings on the class AB notes for the RMS Series 2007-1HE and RMS Series 2007-2H transactions as well as the class A and class AB notes for the RHG Mortgage Securities Trust - Series 2006-1 transaction (see list).
The key aspects of the transactions are as follows:The RMS Series 2007-1HE and RMS Series 2007-2H transactions are characterized as high loan-to-value (LTV) ratio pools, increasing the risk profile during their remaining term as default and prepayment stresses flow through the transaction. The weighted-average seasoning of the underlying assets in all three transactions exceeds nine years. All transactions have a subordinated class B note. The class B notes have no hard credit support, and rely on excess spread and lenders' mortgage insurance (LMI) to cover any losses that occur. The pools are all 100% covered by LMI. The LMI providers are Genworth Financial Mortgage Insurance Pty Ltd. and QBE Lenders' Mortgage Insurance Ltd., which have a claims-adjustment classification of CA1, and Prime Insurance Group Ltd. (PIGL), which has a claims-adjustment classification of CA4, under our "Methodology For Assessing Mortgage Insurance And Similar Guarantees And Supports In Structured And Public Sector Finance And Covered Bonds" criteria, published on Dec. 7, 2014.The transactions have a reserve that is used to fund redraws to borrowers. The reserve is held in an account under the name of RHG Mortgage Corp. Ltd.
The lowering of our rating on the class B notes reflects the growing potential for tail-end risks as the pools decrease in size. The class B notes would be more sensitive to tail-end risks than a comparable larger pool. This sensitivity is heightened by a lack of hard credit support provided to class B notes. This means the class B notes are reliant on the availability of excess spread and LMI. The notes are therefore sensitive to the timing and amount of losses in each transaction.
We expect the transactions to become further concentrated as the asset pools continue to amortize. We have assessed pool concentrations by sizing an alternate loss scenario for the pool. Under this scenario, the top 10 loans at the 'AAA' rating category level and top six loans at the 'A' rating category default and are recovered upon. The loss severity for each loan is the higher of 50%, the loan's loss severity, and the pool's weighted-average loss severity. The expected loss for the pool is the higher of that number, and the number sized applying our "Australian RMBS Rating Methodology And Assumptions" criteria, published on Sept. 1, 2011. This approach is consistent with the "U. S. RMBS Surveillance Credit And Cash Flow Analysis For Pre-2009 Originations" criteria, published March 2, 2016.
RMS Series 2007-1HE has a current reported weighted-average LTV ratio of 83.5% and a consolidated current loan balance of A$40.8 million. RMS Series 2007-2H has a current reported weighted-average LTV ratio of 83.7% and a consolidated current loan balance of A$43.8 million. We believe that the high LTV ratios associated with the underlying asset pool increase the transactions' sensitivity to prepayment and default stresses as the pools amortize during the remaining terms.
RHG Mortgage Securities Trust - Series 2006-1 has a lower weighted-average LTV ratio than the RMS Series 2007 transactions, at 56.2%, and a larger consolidated current loan balance, at A$58.7 million. We believe the risk profile of the transaction is different to the RMS Series 2007 transactions, and we consider it to be less sensitive to prepayment and default stresses. Similar to the RMS 2007 transactions, the RHG Mortgage Securities Trust - Series 2006-1 transaction's class B notes rely on the use of excess spread and LMI to cover any potential loss, therefore making the notes sensitive to the timing of defaults. This is reflected in our rating on the RHG Mortgage Securities Trust - Series 2006-1 transaction's class B notes.
Our cash-flow analysis suggests the asset liability mismatch caused by reserves sitting in an account in the name of RHG Mortgage Corp. Ltd. might place a strain on the transactions in certain circumstances.
The rating affirmations on the class A and class AB notes reflect the following:The amount of credit support provided to the class A and class AB notes exceed the minimum amount assessed commensurate with a 'AAA (sf)' rating and is sufficient to withstand the stresses commensurate with the rating. The class A and class AB notes pass the recommended rating under all scenarios analyzed under our "Methodology And Assumptions For Analyzing The Cash Flow And Payment Structures Of Australian and New Zealand RMBS" criteria, published on June 2, 2010.