Ratings Services Release RMBS Rules
Fitch Ratings and Standar & Poors (S&P) Ratings services both published their methodology and assumptions for evaluating residential mortgage-backed securities (RMBS) in November. Look for both services to issue updated ratings over the next few weeks.
Fitch Ratings has revised its surveillance methodology for U.S. sub-prime RMBS to reflect increased emphasis on ResiLogic, their loan-level and loss model. Going forward, ResiLogic will be used to guide collateral loss projections by estimating the frequency of foreclosure for all mortgage pools regardless of seasoning and the loss severity of pools seasoned less than 30 months. For pools seasoned more than 30 months, Fitch believes actual loss severity trends exhibited by the pools are the best indicator of future severity trends. This loan-level analysis will be used in conjunction with Fitch’s existing break loss analysis to determine each bond’s loss coverage ratio.
The ResiLogic stressed mortgage pool loss scenarios will also be used in determining targeted loss multiples at each rating category resulting in pool-specific category thresholds as opposed to using a static set of thresholds. Other adjustments to the methodology include:
- An adjustment to the ResiLogic derived default rates for performing loans to account for the actual performance of each transaction relative to original expectations.
- The use of historical loan-level loss severities on seasoned (greater than 30 months) pools.
Fitch is reviewing its rated transactions for 2005, 2006 and 2007 and will be releasing revised ratings soon. The current revised cumulative loss expectations for these years are 12 percent, 27 percent and 31 percent respectively. The Updated Surveillance Criteria for U.S. Subprime RMBS are available online at www.fitchratings.com.
Standard & Poor’s Rating Services also recently published the methodology and assumptions fo rating U.S. RMBS backed by non-performing or re-performing mortgage loans. Given the current market conditions and the stresses on lenders, borrowers, and the real estate industry, S&P aexpects the volume of transactions backed by non-performing or re-performing collateral submitted for review to increase.
Collateral for RMBS can be real property or loans. Loans which are more than 90 days delinquent are considered non-performing if the borrower has not exhibted consistent payment behavior. Re-performing loans are loans which have been delinquent more than 90 days in the past year but are currently less than 90 days delinquent or that are 90 days delinquent but the borrower is exhibiting consistent payment behavior. When assessing the expectations regarding the timing and liquidation values of non-performing loans the following factors are taken into account:
- The accuracy of a licensed real estate broker’s opinion of the property’s value (the so-called broker price opinion or BPO value.
- State foreclosure and REO time-line variations and expenses.
- Housing market conditions.
Re-performing loans are assessed using substantially credit analysis to estimate foreclosure frequency and loss severity. The analysis of the age of credit scores, treatment of arrearages and loan seasoning adjustments differ for re-performing loans.
S&P continues to update methodologies and assumptions for the analysis of non-performing and re-performing loans based upon performance trends and updated economic projections. In addition, S&P believes unique risks must be evaluated in proposed transaction structures with regard to liquidating trusts. The methodologies are published on the S&P web site at www2.standardandpoors.com.