Taishin Mortgage Loan Securitisation Trust 2004-1

Analysts:
Diane Lam, CFA, Hong Kong
Gloria Lu, CFA, Hong Kong
Jerry Fang, Taipei
Clementine Kiang, Taipei

This report does not constitute a recommendation to buy, hold, or sell securities. The ratings also do not address the likelihood or timing of prepayment.

Rating Details

Profile

Rationale

Taiwan Ratings Corp. today assigned its ratings to NT$4.385 billion mortgage-backed floating rate certificates issued by the issuer.

The ratings address the full and timely payment of interest and the ultimate full repayment of the principal by the transaction's legal final maturity date of June 21, 2026. The final ratings were assigned on the closing date following a satisfactory review of all documents and legal opinions, as well as tax opinions and rulings.

The ratings are based on:
* Taiwan Ratings' analysis of the portfolio of assets transferred to the SPT, consisting of a pool of first-ranking mortgage loans secured over residential properties located in Taiwan;
* The appropriate size of the credit enhancement for each rated class of certificates, and the subordination structure as provided for each rated class of certificates, including the unrated, fully subordinated class D certificates;
* The sound payment structure and cash flow mechanics of the transaction;
* The establishment of a cash reserve and liquidity facility at closing to mitigate servicer transition risk and to cover temporary senior expenses payment shortfalls and interest payment shortfalls on the rated certificates;
* A conservative cash flow analysis, in which the stress assumptions have taken into account the risk of a mismatch in interest rates on certain types of mortgage loans in the asset pool and those on rated certificates;
* The servicing capability of Taishin;
* The establishment of servicer replacement trigger events, under which Citibank N.A., Taipei Branch, the back-up servicer, will replace Taishin as the servicer if necessary;
* The ratings of the service providers, such as the account bank and liquidity facility provider; and
* The bankruptcy remoteness of the SPT.

Originator/Servicer

Established in 1992, Taishin was one of sixteen new banks formed in 1991- 1992 in response to the liberalization of Taiwan's financial sector. The bank is a full service commercial bank offering a standard range of products and services, including commercial and consumer lending, trade financing, retail banking, foreign exchange, and trust services. At the end of November 2003, the bank reported total assets of NT$554.1 billion, representing 2.4% of system-wide assets and ranking it 13th among 51 domestic banks. In terms of mortgage loans, Taishin has a 3.2% market share, ranking it ninth among domestic banks, and placing it among the top three if state-run and former state-run banks are excluded.

In February 2002, Taishin significantly enlarged its business scale by merging with Dah An Commercial Bank, a mid-size domestic bank. As a result, Taishin's branch network expanded to 89 branches from 52 previously. At the same time, the deposits and loans of the consolidated entity increased by nearly 169% and 150%, respectively. A new district center was established to maintain accounts originated by Dah An Commercial Bank. The entrusted loan pool does not contain mortgage loans originated by Dah An Commercial Bank.

To enhance Taishin's underwriting quality, in 1999 the bank centralized its loan approval and collection at newly established regional centers. Consequently, Taishin's nonperforming loan ratio for mortgage loans has improved significantly.

Transaction Overview

At the closing of the transaction, Taishin transferred a static portfolio of eligible residential mortgage loans, denominated in New Taiwan dollars totaling around NT$4,7billion to the SPT. The loans are first-ranking mortgages originated by Taishin under its usual origination programs. The SPT issues three tranches of rated certificates - Class A ('twAAA'), Class B ('twA'), Class C ('twBBB') - and unrated Class D subordinate certificates. The interest on the certificates is payable quarterly in arrears on the 21st day of March, June, September and December in each year, commencing in June 2004, and the certificates have a final legal maturity of June 21, 2026. The residual Class D certificates will be unrated and retained by Taishin.

Credit support for the senior certificates is provided by the junior certificates and the residual class D certificates. Credit support for the most junior rated Class C certificates comes from the residual Class D certificates, which will absorb the first losses incurred in the portfolio.

The interest collected from the loans in the loan portfolio, after deducting for taxes and senior expenses, will be used to repay any Liquidity Draw, and then pay down the interest accrued on the rated certificates. The remaining amount (excess interest) will be used to replenish the reserve account first, repay principal draw second, cover junior trustee expenses third, and cover junior servicer expenses fourth. Any excess interest remaining will be used to reinstate the charge-off amounts. After reinstating the charge-off amounts, excess interest, if any, will be paid to the holders of the Class D Certificates.

The principal collected from the entrusted loan pool will be used to pay any senior expenses shortfall, and then pay any interest shortfall on the rated certificates when the liquidity facility is fully utilized. Any remaining collections will then be used to repay the principal of the Class A certificates in full before the principal of the Class B certificates is redeemed, and so forth. On the other hand, if any charge-offs are incurred in the loan portfolio, they will be allocated to the certificates in the reverse order, that is, starting with the Class D certificates.

Unless previously redeemed by the trustee, the certificates will be repaid on the final legal maturity date of June 21, 2026, which is 24 months after the last mortgage matures in the loan portfolio. The tail period of 24 months ensures that any back-ended losses on the loan portfolio can be liquidated, and the recovery proceeds from such defaulted loans may be available to repay the certificates.

There are two types of mortgages in the portfolio: adjustable rate mortgages (ARMs) and government-subsidized loans (from the NT$800 billion House Purchase Project Loan Scheme). The ARMs rate is the average of the one-year time savings deposit rate of the six major banks in Taiwan, while the index rate for the government-subsidized loans is the two-year government postal savings deposit rate (Postal rate). The contracted interest rate on the rated certificates is the ARMs rate plus a different spread for each rated class. The basis risk stemming from the mismatch between the Postal and ARMs interest rates has been taken into account in the stress assumptions of the cash flow analysis.

All repayments under the mortgage loans will be collected by Taishin as the servicer. Should a servicer termination event occur, the back-up servicer will replace Taishin as the servicer. The servicer will deposit collections to the collection account within one business day of receipt. On each payment date, the trustee will distribute payments according to the trust agreement.

To cover any shortfall in the senior expenses payments, a static cash reserve funded by the proceeds from the certificate issuance will be set aside at closing. For any shortfall in the interest payments to the certificate holders, a liquidity facility provided by Citibank N.A., Taipei Branch will be available at closing. The commitment amount under the liquidity facility will not amortize unlike the rated certificates.

The Loan Portfolio

The collateral consists of a portfolio of 2,571 residential mortgage loans, for an aggregate amount of approximately NT$4.8 billion as of the cut-off date on Feb. 27, 2004. (This dollar amount differs slightly from the final amount of about NT$4,7 billion in loans transferred to the SPT, because some of the initial loans identified for transfer have become ineligible prior to the transfer date). Pool characteristics include the following:

* All loans are secured by a first fixed lien on the residential properties located in Taiwan;
* About 21.1% of the loans, in terms of current loan balance, are located in Taipei City, 77.6% in northern Taiwan, including Taipei County, Taoyuan City and County, as well as Hsinchu City and County, while the remaining 1.3% are in other northern areas;
* In terms of the interest benchmark of the loan pool, 22.5% of total loans are government-subsidized loans based on the Postal rate, while the remaining 77.5% originated by Taishin are ARMs;
* The weighted averaged Loan To Value (LTV) of the Portfolio is 67.6%, with a maximum LTV of 90.0%;
* The maximum tenor of a loan is 20 years;
* The loan pool has a weighted average loan seasoning of 27 months;
* The average outstanding loan balance is NT$1.86 million;
* For about 5.35% of the loans, calculated by current loan balance, the borrowers only pay interest for a period of up to the first three years. After this period has finished, these loans will convert automatically into regular amortizing term loans.

Credit and Cash Flow Analysis

Taiwan Ratings performed the credit analysis of the transaction based on its rating criteria of residential mortgage-backed securities. The credit assessment also took into account the specific attributes of the loan pool and the historical performance of Taishin's overall mortgage loans and mortgage loans domiciled in northern Taiwan. Taiwan Ratings estimated the stress levels in terms of default frequency and loss severity of the loan pool for each rated tranche and incorporated such stress assumptions into the cash flow analysis.

A cash flow analysis was conducted to determine the levels of credit support for this transaction. Besides default frequency and loss severity, the stress scenarios also addressed the flexibility that the servicer will have in resetting the interest margin, and various levels of prepayment, interest indices, and delinquencies.

Structural Analysis
Interest rate risk/basis risk.
The transaction is somewhat exposed to basis risk. The interest payable to the rated certificates will be an ARMs-based floating rate. Although 77.5% of the loan pool, in terms of current loan balance, pay interest according to an ARMs-based floating rate, and the remaining 22.5% of the loan pool are government-subsidized loans which pay interest according to Postal-based floating rates, there will be no basis swap to hedge basis risk. However, such basis risk has been taken into account in cash flow stress tests.

Taiwan Ratings also ran various interest rate scenarios, in terms of the ARMs and Postal index rates to ensure that the level of overcollateralization was sufficient to cover basis risk.

Prepayment risk.
If prepayment occurs when the transaction is generating excess yield, the SPT faces reinvestment risks. Reinvestment risks arise as the certificates pay interest on a quarterly basis, the period of associated negative carry is up to three months. Taiwan Ratings stressed various rates of prepayment in the cash flow analysis and such risk has been appropriately addressed in the ultimate level of credit support.

Commingling risk.
The servicer is obligated to remit principal and interest collections, such as scheduled repayment, liquidation proceeds and principal prepayment, to the SPT's bank account one business day after receipt. As a result, the transaction is exposed to commingling risk, in the event that the servicer becomes insolvent while holding the proceeds collected for the SPT. The commingling risk will be mitigated by subordination provided to the transaction.

Set-off risk.
Because the originator is a deposit-taking institution, many of the obligors have deposits with the originator. Those obligors have the right to offset their mortgage loans with their deposits held by the originator. This exposes the transaction to set-off risk. The amount each obligor is allowed to set-off will be fixed at closing. Set-off risk is partly mitigated by the government's deposit insurance scheme, under which the government-funded Central Deposit Insurance Co. offers deposit insurance of up to NT$1 million for every depositor in each bank in Taiwan. Moreover, such static risk was sized and mitigated by subordination.

Servicer transition risk.
A servicer transition may negatively affect the cash flow of the transaction. Should a servicer termination event occur, the back-up servicer would become a servicer. According to the servicer agreement, the back-up servicer would be required to provide full servicing of the portfolio no later than 60 days from the initial appointment. The potential operational and cash flow risks associated during this transition period will be mitigated by both the cash reserve and liquidity facility.

Moreover, the outgoing servicer is required to send out notifications after occurrence of a servicer termination event with the account remitting details of the replacement bank for borrowers. A one-time notification cost to borrowers has been sized in the cash reserve and liquidity facility.

Earthquake risk.
Earthquake risk is somewhat moderated by earthquake insurance, as loans originated after April 2002 are covered by earthquake insurance. The maximum available earthquake coverage is NT$1.2 million. Earthquake insurance became mandatory in Taiwan for mortgages extended after April 2002, but refinanced mortgages do not require such insurance.

Earthquake risk is mainly mitigated by geographic diversification in terms of zip code. An analysis of the zip codes reveals that the maximum exposure per zip code is below approximately 7% in terms of loan balance outstanding.

Legal and Tax Analysis
The transaction is structured in accordance with the Financial Asset Securitization Law of Taiwan. The law requires the trustee to withhold 6% on interest paid to certificate holders for tax purposes. Therefore, certificate holders will receive their coupon, net of the required taxes. Prior to assigning the final ratings and the closing of the transaction, Taiwan Ratings received satisfactory legal, accounting, and tax opinions.