Fitch Reviews U. S. Small Balance CMBS Transactions
Rating Action Summary:
--299 classes affirmed;
--65 classes upgraded;
--21 classes downgraded;
--Six classes placed on Rating Watch Negative.
A spreadsheet detailing Fitch's rating actions can be found at 'www. fitchratings. com' by performing a title search for 'U. S. Small-Balance CMBS Rating Actions for June 20, 2016'.
KEY RATING DRIVERS
The rating affirmations reflect the stable to improving performance of the collateral. Since the prior review in June 2015 the average serious delinquency rate declined roughly 90 basis points. The upgrades reflect an improvement in the relationship between credit enhancement and expected loss. All of the downgraded classes were previously rated 'CCCsf' or lower, and reflect a higher likelihood of default. Six investment grade classes - all from a single transaction - were placed on Rating Watch Negative due to interest shortfalls reported on the trustee remittance report. The classes are expected to recover full principal under high investment grade stress scenarios.
Since loan level information is generally not available for these transactions, projected losses are derived based on pool-level performance data. The probability of default (PD) assumptions are based on average output from Fitch's U. S. RMBS Loan Loss Model, specific to sector, vintage and delinquency status. The majority of deals reviewed used average model default levels from the Alt-A sector due to similarities with Alt-A loan attributes and performance. Only two transactions used subprime sector averages. Default expectations were generally lower than the prior review due to enhancements made to the U. S. RMBS Loan Loss Model in May 2016, most notably the inclusion of a cure-rate adjustment to the PD.
The base-case loss severity (LS) projections are determined by issuer-level 12-month historical LS averages, and ranged from 65% - 85%. Stressed loss severity assumptions are based off average LS multiples from the U. S. RMBS Loan Loss Model.
Fitch's cash flow analysis assumes prepayment, loss-timing, and servicer advancing behavior consistent with Alt-A sector vintage averages. For transactions where cash flow analysis is not available, Fitch compared the current bond credit enhancement (CE) to the remaining expected pool loss in each rating stress.
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 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.