S&P: All Mortgage Underwriting Models Are Not Created.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Aug. 28, 2002--The refinance waves sweeping the residential mortgage markets have accelerated the implementation and utilization of automated underwriting systems.

The efficiencies of such systems have allowed originators of both nonconforming and conforming loans to keep pace with record application volumes.

While this growth in model usage is impressive, the originators are cautioned that all models are not created to accurately reflect the risks of all mortgage products.

Specifically, the LEVELS and DACSS (Document and Collateral Scoring System) models developed and distributed by Standard & Poor's Ratings Services have been designed to quantify the risk of nonconforming mortgages including jumbo, Alt-A, and subprime loans according to current rating criteria (a conforming loan model has been developed but is not yet available for external distribution).

"Originators use the assessment of risk from these models at the point of application as well as when loans are pooled for securitization," said Frank Raiter, Managing Director and head of the RMBS group at Standard & Poor's. "Models distributed by other firms that were developed for conforming mortgage products do not provide results that are either consistent with this criteria or acceptable by Standard & Poor's in its rating analyses."

These alternative models may not require the same loan level information in their analyses as required by Standard & Poor's and their results cannot be substituted for the loan level data necessary for performing a rating analysis.

The format for submitting residential mortgage data to Standard & Poor's for rating analysis is quite specific. The format and the associated instructions require that the documentation for the loan received at closing be disclosed on the tape. There are no exceptions to this requirement. (The rating of a pool of mortgage loans requires detailed loan-level data that is communicated to the rating agency in electronic, or "tape" format.)

The fact that the originator of the loan utilized a model, even one developed by Standard & Poor's, has no bearing on the requirement that the tape reflect the actual loan data according to Standard & Poor's criteria. In the case of acceptable alternative documentation for jumbo mortgages, Standard & Poor's developed the DACSS model that scores and sorts loans according to Standard & Poor's criteria and allows certain loans to be submitted for ratings with less strenuous levels of documentation than is typically required.

This model was developed specifically for the nonconforming market and has been distributed and made available for the past six months. Originators utilizing DACSS at the front end of their application process are provided acceptable documentation alternatives at the time the loan is granted.

Nonetheless, originators using DACSS must also provide the actual documentation type for each loan when submitting loan-level detail for ratings. The score from the DACSS model is incorporated in the analysis at the time the loan pool is submitted for rating.

Standard & Poor's relies on the accuracy of the data provided by originators and issuers when analyzing pools of mortgages in the rating process. The standard representations and warranties required by Standard & Poor's require that the loan schedule information regarding loans be true and correct.

The loan schedules disclosed in the pooling and servicing agreement and the prospectus are reviewed for consistency with the information provided for the rating analysis. Altering loan detail, such as the documentation associated with a specific loan based on the score from an automated underwriting system, is clearly inconsistent with Standard & Poor's format requirements and the standard representations and warranties.

"Any departure from the current standards for accuracy of loan-level data jeopardizes the integrity of assigned ratings," said Susan Barnes, a Director in Standard & Poor's RMBS group. "Standard & Poor's has developed models for originators to use in streamlining the loan application process."

These models are readily available and are rigorously maintained and updated by Standard & Poor's. No other models in the marketplace have been reviewed or approved by Standard & Poor's and it is not contemplated that they will be reviewed or approved, Barnes said.

Members of the media may contact Adam Tempkin, media relations manager, at 212/438-7530, or [e-mail].

Copyright 2002, Standard & Poor's Ratings Services