NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed six classes and downgraded one from six Home equity conversion mortgages (HECM) Reverse Mortgage Transactions as follows:
Mortgage Equity Conversion Asset Corporation 2006-SFG1
--Class A (61910RAA9) at 'Asf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2006-SFG2
--Class A (61910YAA4) at 'Asf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2006-SFG3
--Class A (61911AAA5) at 'Asf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2007-FF1
--Class A (61910AAA6) at 'Asf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2007-FF3
--Class A (61911GAA2) at 'Asf'; Outlook Stable;
--Class IO (61911GAB0) at 'Asf'; Outlook Stable.
RiverView HECM Trust 2007-1
--Class A (769422AA4) downgraded to 'BBsf' from 'BBBsf'; Outlook revised to Negative from Stable.
KEY RATING DRIVERS
HECM are Federal Housing Administration (FHA) reverse-mortgage loans insured by the U.S. Department of Housing and Urban Development (HUD) and secured by one-to-four-family, first lien, residential properties. Unlike most forward mortgages, reverse mortgage loan balances can increase due to draws, accrued interest or incurred expenses. Servicers can assign the loan to HUD for repayment once the loan balance has increased to 98% of a maximum claim amount determined at origination.
The loans can experience a maturity event requiring repayment in full upon vacating the property or death. If a maturity event occurs prior to the servicer assigning the loan to HUD and the borrower or the borrower's estate is unable to repay the loan in full, the servicer may initiate foreclosure on the property.
If the foreclosed property becomes Real-Estate-Owned (REO) and remains in REO over six months, the insurance proceeds will be determined by the FHA based on a full appraisal of the property. If the property ultimately is sold for less than the appraised amount, the trust could experience unexpected uninsured losses.
Due to the stress experienced in the housing market over the past several years, an increased number of HECM loans are maturing in a negative equity position resulting in an increased number of foreclosures. The weak housing market has also resulted in an increased number of foreclosures ultimately becoming REO and taking longer than six months to liquidate. Historically, roughly 25% of non-agency loans which entered foreclosure ultimately liquidated after more than six months in REO.
To estimate the likelihood of uninsured losses from REO liquidations, Fitch assumed all loans in a negative equity position at the time of a maturity event will enter into foreclosure.
To determine a borrower's current equity position, Fitch used the original appraisal, adjusted to today's value with the Case-Shiller index and Fitch's proprietary sustainable home value model. Consistent with Fitch's RMBS rating methodology, Fitch assumed increasingly higher market-value-declines in the rating stress scenarios when estimating the borrower's equity position. In the 'AAAsf' rating scenario, Fitch assumes market value declines of 35% below a sustainable level.
Fitch also assumed in the rating-stress scenarios an increasingly higher-than-expected percentage of foreclosure loans would liquidate from REO in over six months. Fitch assumed 25% of initiated foreclosed loans in the base-case and 60% of initiated foreclosure loans in the 'AAAsf' scenario would both become REO and liquidate from REO in over six months.
To estimate the amount of the loss due to an extended REO liquidation, Fitch assumed the difference between the liquidation value and the FHA appraised value will be 5% in the base-case and increasingly higher in the rating stress scenarios. In the 'AAAsf' scenario, Fitch assumed the difference will be 30%. These discounts to the appraised values are notably less than typical quick-sale-adjustments applied to distressed sale valuations since the discount in this instance is applied to a full appraisal after the property has been acquired by the servicer, rather than an external appraisal or broker-price-opinion performed at the time of foreclosure initiation.
Fitch predicts the timing and likelihood of maturity events using actuarial tables. While slower-than-expected maturity events can put liquidity pressure on the trust's cashflow, faster-than-expected maturity events can increase the likelihood of uninsured losses since an increasing percentage of maturity events would occur prior to the loan being assigned to HUD due to reaching 98% of the maximum claim. To stress the timing and amount of uninsured losses, Fitch assumed faster-than-expected maturity events. In the 'AAAsf' scenario, Fitch assumed maturity events occurred five years faster than expected.
Based on the assumptions described below, Fitch assumed an average uninsured loss of less than 5 bps in the base-case and up to approximately 500 basis points in the 'AAAsf' scenario. Based on current credit enhancement and excess spread, Fitch estimates the bonds are protected against approximately 330 basis points of uninsured mortgage loss on average.
The credit enhancement provided for the rated class in the Riverview HECM 2007-1 was determined to be less than that provided in the other transactions and more sensitive to rating sensitivity scenarios. Consequently, the class was downgraded to a lower rating than those in the other transactions.
In addition to the relationship between the expected losses and credit enhancement, the rating committee also considered the limited amount of available data for the loan-level performance of reverse mortgages when determining credit ratings for the bonds.
Fitch analyzes each bond in the 'Bsf' to 'AAAsf' scenarios to determine the likelihood of full principal recovery and interest. The scenario analysis incorporates Fitch's market value decline assumptions, probability of a loan of taking longer than six months to sell from REO, and probability of a HUD appraisal being lower than the liquidation price.
The analysis includes rating stress scenarios from 'Bsf' to 'AAAsf'. The 'Bsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'Bsf' are increasingly more stressful and less-likely outcome. 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.
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. RMBS Surveillance Criteria' (Oct. 10, 2013);
--'Global Structured Finance Rating Criteria' (May 20, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).
Applicable Criteria and Related Research:
U.S. RMBS Surveillance Criteria
Global Structured Finance Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds