Standard & Poor's published refined methodologies and assumptions for rating RMBS deals that are backed by prime, Alt- A, and subprime mortgages.
The criteria changes represent a significant update to previous methodologies and assumptions for determining credit enhancement levels.
The core of the firm's approach was to establish an 'AAA' credit enhancement level that should be enough for securities rated at that category to withstand an extreme economic downturn without defaulting.
The primary point of the firm's updated criteria was to define an "archetypical pool" and its associated credit enhancement level at the 'AAA' rating category.
Based on the rating firm's analysis under the revised criteria, it arrived at a 7.5% 'AAA' credit enhancement level for the archetypical prime pool.
Although S&P determined this higher credit enhancement level based on several factors, the agency primarily focused on its assessment of potential borrower default behavior and property value declines under conditions of extreme stress, including those during the Great Depression.
This represents a major recalibration of the firm's RMBS criteria and is intended to make RMBS ratings more comparable with ratings in other sectors, including U.S. corporates, municipals, sovereigns, as well as other areas of structured finance.
The 7.5% ‘AAA’ credit enhancement level for the archetypical prime pool is a significant increase over the credit enhancement levels under our previous criteria. Although it's hard to determine what “typical” Alt-A and subprime loans will look like in the future, the rating agency expects that an archetypical pool that has similar characteristics to Alt-A and subprime loans would have ‘AAA’ credit enhancement levels of 18% and 30%, respectively.