TEXT-S&P lowers ratings in Dutch RMBS EMF-NL 2008-1 and 2008-2

Thu Dec 27, 2012 6:51am EST

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OVERVIEW

-- On Dec. 5, 2012, we placed on CreditWatch negative our ratings on all classes of notes in EMF-NL 2008-1 and EMF-NL 2008-2 due to deteriorating credit performance.

-- We have observed deteriorating arrears performance and a large amount of 90+ days delinquent loans that have not been actively foreclosed.

-- The low rate of foreclosures means losses are not being realized and consequently, excess spread continues to leave the transaction structures.

-- Following our review and credit and cash flow analysis, we have lowered our ratings on EMF-NL 2008-1's class A2 and A3 notes and EMF-NL 2008-2's A1, A2, B, C, and D notes.

-- Both transactions are backed by a pool of Dutch nonconforming residential mortgages originated by ELQ Hypotheken.

Standard & Poor's Ratings Services today lowered and removed from CreditWatch negative its credit ratings on EMF-NL 2008-1 B.V.'s class A2 and A3 notes. At the same time, we have lowered and removed from CreditWatch negative our ratings on EMF-NL 2008-2 B.V.'s class A1, A2, B, C, and D notes (see list below).

Today's rating actions follow our review of EMF-NL 2008-1 and 2008-2's performance. We have conducted a credit and cash flow analysis, using the most recent transaction information dated October 2012, and have applied our Dutch residential mortgage-backed securities (RMBS) criteria (see "Dutch RMBS Market Overview And Criteria," published on Dec. 16, 2005).

On Dec. 5, 2012, we placed on CreditWatch negative our ratings on all classes of notes in EMF-NL 2008-1 and 2008-2 due to deteriorating credit performance (see "Ratings In Four Dutch Nonconforming RMBS Transactions Placed On CreditWatch Negative Following Performance Deterioration").

CREDIT AND CASH FLOW ANALYSIS

As highlighted in our Dec. 5, 2012 publication, the overall arrears performance for both transactions has deteriorated over 2012, most notably in the 90+ days arrears bucket. We attribute this large increase to the lack of repossessions and foreclosures made on the underlying loans in these transactions. In EMF-NL 2008-1, 90+ days arrears have increased to 11.15% from 9.29% in October 2011. EMF-NL 2008-2 has also experienced an increase to 15.30% from 14.01%.

We have analyzed the payment rate of loans that are more than six months in arrears. We have concluded that approximately 81% of borrowers who are more than six months in arrears for EMF-NL 2008-1, and 83% for EMF-NL 2008-1, have not paid their full scheduled mortgage payments in their previous three payments. Therefore, in our analysis, we excluded approximately 6.78% and 10.34% of loans from the collateral pool and assumed a 50% recovery, to be realized after 18 months. As the majority of the borrowers for these loans have not been current or paying for an extended period of time, we believe they provide no immediate cash flow credit to these transactions until recovery.

For the remaining performing collateral, we applied an additional 5% decrease in house prices, while giving full credit to the house price index (HPI) movement. Furthermore, we expect arrears to increase; therefore, we have adjusted our weighted-average foreclosure frequency (WAFF) by projecting arrears based on the historical performance for each transaction. For EMF-NL 2008-1 and 2008-2 we have projected additional 90+ days arrears that are equal to 2.96% and 4.89%, respectively.

Since November 2011, we have observed an accelerated decline in Dutch house prices, most significantly in the past six months. Our calculations show that the weighted-average indexed loan-to-value ratio for both of these pools has increased, with the decrease in house prices being the main driver. Subsequently our weighted average loss severity (WALS) calculations for these pools have increased. The increase in the WAFF is due to the deteriorating performance of the assets. Based on our analysis, both the WAFF and WALS and the overall credit coverage levels have increased at each rating level since our last review in July 2011.

EMF-NL 2008-1

Rating WAFF WALS CC

level (%) (%) (%)

AAA 48.90 48.86 23.89

AA 40.35 45.39 18.31

A 30.35 40.32 12.24

BBB 19.98 37.01 7.39

BB 15.15 31.30 4.74

EMF-NL 2008-2

Rating WAFF WALS CC

level (%) (%) (%)

AAA 45.21 45.52 20.58

AA 37.88 41.80 15.83

A 29.23 36.37 10.63

BBB 19.85 32.87 6.52

BB 15.77 26.91 4.25

WAFF--Weighted-average foreclosure frequency.

WALS--Weighted-average loss severity.

CC--Credit coverage.

The reserve funds for both transactions are fully funded, although the 2008-2 reserve fund was drawn in April 2012 and topped back up in July 2012. There are no liquidity facilities for these deals, as there has been no replacement liquidity facility in place following Lehman Brothers' insolvency in 2008. Therefore, the transaction's external liquidity support is limited to each respective reserve fund.

Our assumed servicing fees have increased for both these transactions as there was an increase to the servicing fees in 2011, , and we assume that higher interest rate assets will default causing spread compression. This, coupled with our undercollateralized pool assumption, and no liquidity facilities, mean that after the stresses we apply, the available liquidity is extremely limited to ensure timely payment of interest.

If the heavily delinquent loans in both transactions were actively being foreclosed and losses crystalized, available revenue would be used to cover these losses, but currently these amounts are being paid out of the transaction structure as excess spread. As of October 2012, there was no balance on the principal deficiency ledger recording losses on the underlying asset portfolio. Based on discussions with the servicer, our conclusion is that the servicer is waiting for more favorable market conditions before foreclosing on long-term arrears.

After applying our stresses, it is our view that the class A2 and A3 notes in the 2008-1 transaction only have enough current credit enhancement to pass our cash flow analysis at 'A- (sf)' and 'BBB+ (sf)' rating levels, respectively. Therefore, we have lowered and removed from CreditWatch negative our ratings on these classes of notes.

We have lowered and removed from CreditWatch negative our ratings on EMF-NL 2008-2's class A1, A2, and B notes due to our view of the current amount of credit enhancement being insufficient to maintain their current ratings. We have lowered our ratings on the class C and D notes to 'B- (sf)' and 'CCC (sf)', respectively, as under our 'BB' cash flow stresses, there is a risk that these notes could default on their timely payment of interest in the medium term. In our view, this risk is less likely to apply to the class C notes than the class D notes, given that they have a higher amount of credit enhancement and are senior to the class D notes in the payments waterfall.

Both EMF-NL 2008-1 and 2008-2 are backed by a pool of Dutch nonconforming residential mortgages originated by ELQ Hypotheken N.V.

RELATED CRITERIA AND RESEARCH

Related Criteria

-- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Methodology: Credit Stability Criteria, May 3, 2010

-- Update To The Cash Flow Criteria For European RMBS Transactions, Jan. 6, 2009

-- Assessing The NHG Guarantee In Dutch RMBS Transactions--A Prudent Approach, June 11, 2008

-- Changes To The Treatment Of Potential Set-Off Risk In The Dutch RMBS Market, Sept. 8, 2006

-- Dutch RMBS Market Overview And Criteria, Dec. 16, 2005

-- Cash Flow Criteria for European RMBS Transactions, Nov. 20, 2003

Related Research

-- Ratings In Four Dutch Nonconforming RMBS Transactions Placed On CreditWatch Negative Following Performance Deterioration, Dec. 5, 2012

-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012

-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011

-- Dutch RMBS Index Report, published quarterly

RATINGS LIST

Class Rating

To From

EMF-NL 2008-1 B.V.

EUR265.01 Million Mortgage-Backed Floating-Rate Notes

Ratings Lowered And Removed From CreditWatch Negative

A2 A- (sf) AA+ (sf)/Watch Neg

A3 BBB+ (sf) AA (sf)/Watch Neg

EMF-NL 2008-2 B.V.

EUR285.1 Million Mortgage-Backed Floating-Rate Notes

Ratings Lowered And Removed From CreditWatch Negative

A1 BBB+ (sf) A+ (sf)/Watch Neg

A2 BBB- (sf) A- (sf)/Watch Neg

B BB- (sf) BBB (sf)/Watch Neg

C B- (sf) BB (sf)/Watch Neg

D CCC (sf) B- (sf)/Watch Neg

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