News Column

Fitch Reviews U.S. RMBS Subprime Sector

June 25, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has taken various rating actions on 9,930 classes in 1,133 U.S. Subprime residential mortgage backed security (RMBS) transactions.

Rating Action Summary

--9,747 classes (98%) affirmed;

--153 classes (1.5%) upgraded;

--25 classes (<1%) downgraded;

--5 classes placed on Rating Watch Negative.

In addition, all classes with a rating of 'Dsf', a balance of 0, and a projected recovery estimate of 0 had their ratings affirmed at 'Dsf' and subsequently withdrawn.

A spreadsheet detailing the actions can be found on Fitch's website by performing a title search for 'U.S. RMBS Rating Actions for June 25, 2014' or by clicking the link. In addition, a summary of the mortgage pool and bond analysis can be found by performing a title search for 'RMBS Loss Metrics.'

KEY RATING DRIVERS

Collateral performance has continued to improve modestly since the last review. The serious delinquency rate improved nearly 2% since November 2013 to 31% of outstanding loans. The 2006 vintage improved the most, falling by 3% to 34% of outstanding loans. Performance continues to benefit from rising home prices although the rate of improvement has started to slow. The most recent month's Case Shiller 20-City index increased at an annualized rate of approximately 2%, the lowest figure in over two years. Prepayments have decreased since November, falling on average 3% to 8% across all vintages.

The decrease in delinquency led to a similar improvement in Fitch's average loss assumptions. Probability of default fell by at least 2% to 75% of outstanding loans across all vintages. Total projected losses fell roughly 2% since November to 43% in the base case scenario.

The slight improvement in collateral contributed to a number of rating upgrades. Of the classes upgraded, 75% involved investment-grade ratings. Only 8% of all upgrades were two categories. These classes were previously rated 'BBsf' or below. Additional classes are expected to recover full principal in higher rating stresses but were constrained by rating caps due to additional risks. These rating caps are listed for the bonds affected in 'RMBS Loss Metrics.'

Less than 1% of all classes were downgraded during this review. Of the 25 classes downgraded only two were investment grade prior to the review. Both of those downgrades were classes that were previously on Rating Watch Negative and had growing interest shortfalls. Half of all downgrades were from 'CCsf' to 'Csf'. All classes downgraded to 'Csf' have a high probability of defaulting within the next 12 months.

Fitch recently announced a modest revision in the economic rating stress scenarios for transactions issued prior to 2006. Previously, Fitch applied less severe scenarios to pools securitized prior to 2006 than to those securitized after 2006. Fitch will now apply consistent economic rating stress scenarios across all vintages. Fitch identified 10 classes expected to have model-proposed downgrades due to the revision. Five of the classes are placed on Rating Watch Negative and will be reassessed in the coming months. The remaining five classes are affirmed due to positive trends in the relationship of credit enhancement to delinquency.

RATING SENSITIVITIES:

A detailed list of Fitch's updated probability of default, loss severity, and expected loss can be found by performing a title search for 'RMBS Loss Metrics' at www.fitchratings.com. The report provides a summary of base-case and stressed scenario projections.

Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.

In addition to increasing mortgage pool losses at each rating category to reflect increasingly stressful economic scenarios, Fitch analyzes various loss-timing, prepayment, loan modification, servicer advancing, and interest rate scenarios as part of the cash flow analysis. Each class is analyzed with 43 different combinations of loss, prepayment and interest rate projections.

Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.

The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline further in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.

The spreadsheet 'U.S. RMBS Rating Actions for Jun. 25, 2014' provides the contact information for the performance analyst.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. RMBS Surveillance Criteria' (Jun. 24, 2014);

--'Global Structured Finance Rating Criteria' (May 20, 2014);

--'U.S. RMBS Loan Loss Model Criteria' (Dec. 23, 2013);

--'U.S. RMBS Cash Flow Analysis Criteria' (April 16, 2014);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);

--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions' (May 28, 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);

--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011).

Applicable Criteria and Related Research: U.S. RMBS Rating Actions for June 25, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751299

Structured Finance Recovery Estimates for Distressed Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695535

U.S. RMBS Cash Flow Analysis Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746027

U.S. RMBS Loan Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727095

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748821

U.S. RMBS Surveillance and Re-REMIC Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750110

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836557

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Presenting Analyst

Ryan O'Loughlin

Analyst

+1-212-908-0387

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Committee Chairperson

Grant Bailey

Managing Director

+1-212-908-0544

or

Media Relations

Sandro Scenga, New York, +1-212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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