NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Exposure Draft: U.S. RMBS Re-Performing
Fitch Ratings has announced its expected approach for rating residential mortgage-backed securities (RMBS) backed by re-performing loan (RPL) collateral. The proposed criteria are detailed in an exposure draft published today and Fitch invites feedback on its expected approach.
Fitch expects to analyze the key risk drivers of the RPL asset class using its mortgage loan loss model, and existing representation (rep) and warranty and due diligence review criteria. However, since the existing methodologies were developed with a focus on newly originated and seasoned performing (portfolio) collateral, RPL pools and some seasoned performing pools purchased in the secondary market are likely to have factors that require additional consideration or an alternative approach.
The key features distinguishing RPL RMBS analysis from that of new issue RMBS are the limited rep and warranty frameworks or weak rep providers and the potential for incomplete collateral files or missing documentation. Because the servicer's ability to foreclose and liquidate the property takes on heightened relevance in the agency's RPL analysis, Fitch reviewed each of the 35 reps comprising its existing criteria to determine if the risks they are intended to address could be mitigated by a third party due diligence review of the collateral file or additional credit enhancement (CE).
Through its research, Fitch found that most risks can be addressed by the presence and review of certain loan file documents or additional CE. Therefore, for transactions that do not have all 35 reps listed in existing criteria or that have a below-investment-grade (IG) rep provider, the due diligence and document file reviews will be critical to Fitch for gaining comfort with lien enforceability and the servicers' ability to foreclose.
Other risk factors identified by Fitch include limited servicing and borrower pay history and missing modification type or payment reduction amounts. When estimating losses on RPLs and seasoned performing mortgage loans, Fitch generally uses the same probability of default, loss severity and rating stress framework as used for analyzing newly originated loans. However, Fitch considers additional risk attributes that will drive expected losses for RPL and seasoned mortgage loan pools, which include updated valuation types, borrower pay history and modified payment amounts.
Fitch believes that RPL RMBS transactions backed by highly seasoned performing collateral (i.e. loans aged over 24 months) having sufficiently clean performance history could achieve a high IG rating if the reps and warranties, document file and due diligence review, and transaction structure are also supportive of the rating. Transactions that lack these attributes could present risks that may not be quantifiable and, therefore, may limit the maximum achievable rating from Fitch, or Fitch may decline to rate the transaction.
Fitch is accepting comments on its Exposure Draft until September 15. Comments should be sent to 'RMBSfeedback@fitchratings.com'.
'Exposure Draft: U.S. RMBS Re-Performing Loan Criteria' is available at 'www.fitchratings.com' or by clicking on the above link.
Additional information is available at 'www.fitchratings.com'.