RBS 2006 Annual Report Download - page 152
Download and view the complete annual report
Please find page 152 of the 2006 RBS annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.151
RBS Group • Annual Report and Accounts 2006
Financial statements
Key economic assumptions used in measuring the value of retained interests at the date of securitisation resulting from
securitisations completed during the year were as follows:
US Agency Consumer Commercial
retained retained retained
Assumptions interests interests interests
Prepayment speed 100 – 500 PSA 0 – 40% CPR (1) 0 – 50 CPY (2)
Weighted average life 2 – 18 years 0 – 13 years 1 – 10 years
Cash flow discount rate 0 – 20% 6 – 55% 5 – 9%
Credit losses N/A (3) 0 – 2% CDR (4) 0 – 2% CDR (4)
Key economic assumptions and the sensitivity of the current fair value of retained interests at 31 December 2006 to immediate
adverse changes, as indicated below, in those assumptions are as follows:
US Agency Consumer Commercial
retained retained retained
Assumptions/impact on fair value interests interests interests
Fair value of retained interests at 31 December 2006 (£m) 1,148 818 113
Prepayment speed(5) 10 – 32% CPR (1) 0 – 40% CPR (1) 0 – 100% CPY (2)
Impact on fair value of 10% adverse change (£m) 2.1 15.3 0.1
Impact on fair value of 20% adverse change (£m) 3.7 29.3 0.1
Weighted average life 1 – 18 years 0 – 13 years 1 – 18 years
Cash flow discount rate 0 – 20% 6 – 73% 5 – 9%
Impact on fair value of 10% adverse change (£m) 23.8 23.7 3.3
Impact on fair value of 20% adverse change (£m) 46.5 46.0 6.4
Credit losses N/A (3) 0 – 3% CDR (4) 0 – 2% CDR (4)
Impact on fair value of 10% adverse change (£m) N/A 36.2 0.1
Impact on fair value of 20% adverse change (£m) N/A 50.8 0.1
Notes:
(1) Constant prepayment rate (“CPR”) – the CPR range represents the low and high points of a dynamic CPR curve.
(2) CPR with yield maintenance provision and thus prepayment risk is limited.
(3) US Agency retained interests are securities whose principal and interest have been guaranteed by various United States government sponsored enterprises (‘GSEs’). These
GSEs include the Federal National Mortgage Association (‘Fannie Mae’), the Federal Home Loan Mortgage Corporation (‘Freddie Mac’), and the Government National Mortgage
Association (‘Ginnie Mae’). Fannie Mae and Freddie Mac are federally regulated but are privately owned. These GSEs guarantee that the holders of their mortgage-backed
securities will receive payments of interest and principal. Securities guaranteed by either of these two GSEs, although not formally rated, are regarded as having a credit rating
equivalent to AAA. Ginnie Mae guarantees the timely payment of principal and interest on all of its mortgage-backed securities, and its guarantee is backed by the full faith and
credit of the United States Government.
(4) Constant default rate.
(5) Prepayment speed has been stressed on an overall portfolio basis for US Agency retained interests due to the overall homogeneous nature of the collateral. Consumer and
commercial retained interests have been stressed on a security level basis.
The sensitivities depicted in the preceding table are
hypothetical and should be used with caution. The likelihood of
those percent variations selected for sensitivity testing is not
necessarily indicative of expected market movements because
the relationship of the change in the assumptions to the
change in fair value may not be linear. Also, the effect of a
variation in a particular assumption on the fair value of a
retained interest is calculated without changing any other
assumptions. This might not be the case in actual market
conditions since changes in one factor might result in changes
to other factors. Further, the sensitivities depicted above do not
consider any corrective actions that the Group might take to
mitigate the effect of any adverse changes in one or more key
assumptions.
Mortgage-backed securities
The Group sells originated mortgage loans to US government
sponsored enterprises in return for securities backed by these
loans and guaranteed by the Agency whilst retaining the rights
to service the mortgages. These securities may be
subsequently sold. The purchaser has recourse to the Group
for losses up to pre-determined levels on certain designated
mortgages. The Group is not obliged, and does not intend, to
support losses that may be suffered by the Agencies. Under
the terms of the sale agreements, the Agencies have agreed
to seek repayment only from the cash from the mortgage
loans. Once the securities exchanged for the loans have been
sold the Group’s exposure is restricted to the amount of the
recourse. At 31 December 2006 mortgages amounting to
£144 million (2005 – £385 million) had been sold with recourse
to US GSEs. These loans have been derecognised.