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RMBS: U.S. Residen al Subprime Mortgage
Criteria: The Ra ng Process For Subprime
Mortgage Transac ons
01-Sep-2004 00:00 EDT
View Analyst Contact Informa on
Table of Contents
Review of the Originator's and Servicer's Opera ons
Collateral, Legal, and Structural Analysis
Ra ng Commi ees
Ra ng Surveillance
Related Research

Editor's Note: This ar cle is no longer current. It has been superseded by the ar cle tled, "Methodology And Assump ons For Ra ng U.S. RMBS Prime,
Alterna ve-A, And Subprime Loans (/en_US/web/guest/ar cle/-/view/sourceId/5584743)," published on Sept. 10, 2009.

The ra ng process for subprime mortgage securi za ons, as for any securi za on, begins when a banker or issuer contacts Standard & Poor's to discuss a
proposal. For new issuers, ini al conversa ons take place six to eight weeks prior to the scheduled pricing of a transac on. Issuers with exis ng subprime
mortgage securi za ons typically begin discussions three to four weeks before a planned issuance. This beginning phase usually takes place through a
conference call or brief mee ng, where an overview of the transac on is presented. The purpose of this first stage is to iden fy any unusual or
complicated structural, credit, or legal issues that may need to be ironed out before a formal ra ng process can begin. If no such complica on exists, the
ra ng process proceeds according to an agreed-upon me schedule.

Review of the Originator's and Servicer's Opera ons

When the issuer decides to proceed, a complete analysis of the transac on begins. Ra ng analysts meet on-site with management of the originator or
seller of the receivables. This exercise enables analysts to expand their understanding of the issuer's strategic and opera onal objec ves. It also provides a
more defined level of familiarity with underwri ng policies, contractual breach procedures, and opera onal controls. Generally, the review includes:

A financial and corporate overview of the originator and servicer as presented by senior management;
A discussion of the originator's and servicer's history in the subprime mortgage business and strategic plan; and
A mee ng with senior management and key personnel from per nent areas, such as underwri ng, loan disposi on, computer systems u lized by the
company, internal audit, finance, and sales and marke ng.
In addi on, a detailed discussion of the characteris cs of the originator's collateral, the repayment pa ern of the obligors, and the performance history of
the assets, as well as an examina on of prior transac ons, is typically undertaken. These discussions are o en complemented by walk-through tours of
the originator and servicer.

Analysts perform a review of all new issuers. For frequent issuers, analysts usually perform these reviews annually, or more frequently if circumstances
have changed, for example, due to significant procedural or technological enhancements.

It is important to note that the review does not include an audit. Instead, the ra ng is based on the representa ons of the various par es to the
transac on, including the issuer and its counsel, the investment banker and its counsel, and the issuer's accountants. More details on Standard and Poor's
underwri ng and servicer evalua on criteria can be found in the "Issuer Reviews (/en_US/web/guest/ar cle/-/view/sourceId/5649112)" and "Servicer

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Evalua on Criteria (/en_US/web/guest/ar cle/-/view/sourceId/5694636)" sec ons.

Collateral, Legal, and Structural Analysis

The analysis focuses primarily on the legal, collateral, and structural characteris cs of the transac on. The legal criteria for structured finance ra ngs was
developed in the early 1980s for mortgage-backed securi es (MBS), and the fundamental tenet of these criteria is to isolate the assets from the credit risk
of the seller.

The collateral analysis involves an in-depth review of historical asset performance. Analysts collect and examine years of data on the performance
variables that affect transac on credit risk.

The structural review involves an examina on of the disclosure and contractually binding documents for the transac on. The criteria cover many aspects
of the structure, from the method of conveyance of mortgage loans to the trust, to the method of security payment and termina on. The analysis also
considers the payment alloca on and what is being promised to security holders.

The prospectus for publicly rated transac ons is prepared by the issuer's counsel before a transac on is priced. However, the underlying documenta on
determines whether the structure will afford interest as promised and ul mate principal payments. The most important of these documents is the
pooling and servicing agreement. All new issuers generally submit the first dra of the pooling and servicing agreement which should be in substan ally
complete form, as significant subsequent changes to the agreement may cause a delay in the ra ng of the transac on.

Ra ng Commi ees
A team of analysts is assigned to each transac on. A er the team performs its review of the issuer's opera ons and analyzes the collateral, a commi ee
of appropriately trained and experienced analysts is assembled to determine whether the transac on has sufficient credit enhancement for the desired
ra ng. Analysts ordinarily present the credit and structural aspects of a transac on to a ra ng commi ee before a transac on is priced.

The transac on team is responsible for ensuring that all per nent informa on is presented to the ra ng commi ee. The commi ee presenta on includes
informa on gathered from the review of the originator and servicer, collateral, cash flows, enhancement recommenda ons, and informa on on the legal
and structural characteris cs of the transac on. This informa on will be compiled into a confiden al presenta on. Once the ra ng commi ee meets and
makes its decision, the results will be conveyed to the banker. A ra ng le er is issued at closing, and for public ra ngs, a credit analysis is normally
disseminated.

Ra ng Surveillance
A er a ra ng is assigned, it is monitored and maintained by the surveillance process. The purpose of surveillance is to ensure that the ra ng con nues to
reflect the performance and structure of the transac on as it was analyzed at transac on closing. Performance informa on is disclosed in a report
prepared monthly by the servicer of the transac on. Before a transac on's closing date, analysts review the data itemized in the servicing report to
ensure that all necessary informa on is included.

The surveillance process encompasses monitoring issue performance and iden fying those issues that should be considered for either an upgrade or a
downgrade. The surveillance func on also encompasses tracking the credit quality of all en es that may be suppor ng par es to the transac on, such
as liquidity enhancers. Analysts review performance data periodically during the course of the transac on and contact the issuer and trustee if ra ngs
change. For changes to public ra ngs, a press release is normally disseminated.

Standard & Poor's must be informed of any changes concerning the original structure of the transac on, including management, credit policy, system
changes, or any change in the status of the original par es involved in the transac on. All informa on will be used as part of normal surveillance
maintenance for the transac on.

Related Research
U.S. Residen al Subprime Mortgage Criteria
The Ra ng Process For Subprime Mortgage Transac ons (/en_US/web/guest/ar cle/-/view/sourceId/5648807)
Loan Quality Guidelines For Subprime Mortgage Transac ons (/en_US/web/guest/ar cle/-/view/sourceId/5648837)
Credit Analysis For Subprime Loan Transac ons (/en_US/web/guest/ar cle/-/view/sourceId/5649271)
Structural Considera ons For Subprime Mortgage Transac ons (/en_US/web/guest/ar cle/-/view/sourceId/5654991)
Legal Criteria For Subprime Mortgage Transac ons (/en_US/web/guest/ar cle/-/view/sourceId/5655408)
Servicer Requirements (/en_US/web/guest/ar cle/-/view/sourceId/5694585)
Servicer Evalua on Criteria (/en_US/web/guest/ar cle/-/view/sourceId/5694636)
Appendix A: Standard & Poor’s Ra ngs File Format (/en_US/web/guest/ar cle/-/view/sourceId/5694676)
Appendix B: Glossary For Standard & Poor’s Ra ngs File Format (/en_US/web/guest/ar cle/-/view/sourceId/5695217)
Appendix C: Informa on Required For On-Site Review Of Company (/en_US/web/guest/ar cle/-/view/sourceId/5695287)

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Appendix D: Income Calcula ons (/en_US/web/guest/ar cle/-/view/sourceId/5695383)

Appendix E: Liabili es And Other Debt (/en_US/web/guest/ar cle/-/view/sourceId/5695389)
Appendix F: Criteria for FICO Scores (/en_US/web/guest/ar cle/-/view/sourceId/5695413)
Sco Mason, New York (1) 212-438-2539;
Analy cal Managers - U.S. RMBS:
sco _mason@standardandpoors.com (mailto:sco _mason@standardandpoors.com)
Becky Cao, New York (1) 212-438-2595;
becky_cao@standardandpoors.com (mailto:becky_cao@standardandpoors.com)
Francis Parisi, Ph.D., New York (1) 212-438-2570;
Global Criteria Officer - U.S. RMBS:
francis_parisi@standardandpoors.com (mailto:francis_parisi@standardandpoors.com)
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