NEW YORK--()--Fitch Ratings has reviewed all rated Prime RMBS transactions and downgraded 6% of the classes comprising those transactions. Adverse selection and structural features vulnerable to tail-risk have increased negative rating pressure for seasoned Prime RMBS.
A list of the classes can be found at 'www.fitchratings.com' by performing a title search for 'U.S. Prime RMBS Rating Actions for Oct. 3, 2012.' A special report describing the evolving credit risk was published September 6 ('U.S. Prime Pre-2005 RMBS: Not What It Used to Be').
Delinquency rates continue to increase in pre-2005 prime pools, even while performance has improved for Alt-A, subprime, and recent vintage prime mortgage pools. For Fitch-rated pre-2005 prime pools, the roll rate from current to delinquency over the most recent three months remains near an all-time high for the cohort's history, and total delinquency is roughly 1.3x higher than 2011 levels.
Reflecting the risk of continued performance deterioration and further rating changes, approximately 14% of all classes remain on Negative Watch. Classes on Negative Watch remain at risk for a further 1 - 2 rating category revision. Fitch expects to resolve the Watch status on all classes prior to the end of this year.
The deterioration in performance in pre-2005 RMBS has been driven by adverse selection in the small remaining mortgage pools. Record-low mortgage rates initially driven by the Federal Reserve and sustained by economic uncertainty have led most pre-2005 borrowers to refinance. Consequently, the remaining mortgage pools are increasingly concentrated with borrowers unable to refinance due to credit obstacles.
Recent performance deterioration is compounded by structural features in pre-2005 transactions. The dollar amount of senior class credit protection will continue to decline in most transactions due to: the lack of hard subordination floors (as found in recent RMBS); structures that pay scheduled principal pro rata to subordinate classes; and the lack of performance triggers that redirect unscheduled principal cash flows from subordinates to senior classes. Since 2010, the dollar amount of senior class credit protection has declined by 33%.
A disproportionate number of bonds collateralized with pre-2005 15-year fixed-rate mortgages were adversely affected by today's rating changes. Despite significant amortization and relatively short remaining terms, performance has deteriorated over the past year reflecting adverse selection. The rate of remaining current borrowers rolling into delinquency continues to increase and is more than 1.5x higher today than three years ago. Additionally, the small remaining loan counts and low credit enhancement leave senior classes increasingly vulnerable to anomalous behavior of individual loans. In July, an unexpectedly high loss severity on a single 15-year fixed-rate loan resulted in a complete writedown of all but one remaining subordinate class in a 2003 vintage transaction.
Fitch considers credit risk associated with small loan counts by incorporating loan concentration adjustments to expected mortgage pool losses and by applying rating caps for bonds which lack structural features to mitigate tail-risk. In RMBS surveillance, concentration adjustments to loss expectations occur when loan counts decline below 100. For bonds without structural features to mitigate tail-risk, rating caps of 'AAsf', 'Asf' and 'BBsf' are applied for loan counts below 75, 50 and 20, respectively. Ratings will be withdrawn when fewer than 10 loans remain. For bonds collateralized with loan counts above 75 and without any structural features to mitigate tail-risk, Fitch will consider the bond's projected months-to-payoff and cap the current rating at 'AAsf' if there is a high likelihood of the bond experiencing tail-risk due to future small loan-count concentration.
Fitch measures loan count using a weighted-average-number (WAN) calculation which considers the distribution of loan size within the pool. This typically results in a lower figure than the actual loan count. For senior bonds which are expected to benefit from cross-collateralized subordinate classes, Fitch typically considers the aggregated figure for all cross-collateralized pools.
The small-loan count methodology described in the paragraph above and the cashflow assumptions used for this review deviate from prior published criteria and will be described in further detail in an updated surveillance criteria report expected to be published later this month. Changes to the cashflow criteria for Prime RMBS include an increase in interest rate stresses, a reduction in projected servicer advancing, a reduction in projected loan-coupon to simulate higher modification activity in high-stress scenarios and a slower benchmark prepayment speed.
These actions were reviewed by a committee of Fitch analysts.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'U.S. Prime Pre-2005 RMBS: Not What It Used to Be' (Sep. 6, 2012);
--'U.S. RMBS Loan Loss Model Criteria' (Aug. 10, 2012);
--'U.S. RMBS Surveillance Criteria' (Aug. 10, 2012);
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions' (Aug. 2, 2012).
Applicable Criteria and Related Research: U.S. Prime RMBS Rating Actions for Oct. 3, 2012
Criteria for Interest Rate Stresses in Structured Finance Transactions
Criteria for Rating Caps in Global Structured Finance Transactions
U.S. Prime Pre-2005 RMBS: Not What It Used to Be (Adverse Selection Increasing Negative Rating Pressure)
U.S. RMBS Loan Loss Model Criteria
U.S. RMBS Surveillance Criteria
Global Structured Finance Rating Criteria
Structured Finance Recovery Estimates for Distressed Securities
Counterparty Criteria for Structured Finance Transactions