Fitch Takes Various Actions on 144 Legacy U.S. Scratch and Dent RMBS Transactions
Rating Action Summary:
--557 classes affirmed;
--104 classes upgraded;
--15 classes downgraded;
--6 classes maintained on Rating Watch Positive;
--4 classes paid in full.
A spreadsheet detailing Fitch's rating actions on the affected transactions can be found using the web link for 'U.S. Scratch and Dent RMBS Rating Actions for April 21, 2016'.
KEY RATING DRIVERS
The ratings of roughly 96% of classes included in this review were affirmed or upgraded. Collateral performance continues to show improvements over the last five years, driven by strong home price growth, improving unemployment rates, and positive selection among remaining borrowers. Among transactions included in this review, those issued between 2003 and 2006 saw an average decrease in 60+ day delinquency (DQ) rates of roughly 220 basis points (bps) since the prior review. The average 60+ DQ rate for transactions issued before 2003 increased roughly 57bps.
Downgrades made up roughly 2% of all rating actions. More than half of the 15 classes that were downgraded held non-investment grade or distressed ratings prior to the review. All downgrades of investment grade ratings were one rating category.
While approximately 15% of all rating actions were upgrades, the ratings of roughly 260 classes reviewed were constrained due to various rating caps, all of which are being affirmed or upgraded. Rating caps were driven by small remaining loan counts, observed and projected interest shortfalls, cash flow timing sensitivity, projected timing until bond payoff, and servicing disruption risk exposure.
Roughly 2% of the classes reviewed had their ratings withdrawn immediately following the rating action. All of those withdrawn were rated 'Dsf' with no remaining balance and no projected recoveries.
Fitch's U.S. RMBS Loan Loss Model was used to derive default and loss expectations. The model-derived loss severity assumptions for severely delinquent loans (90+ DQ, foreclosure and real estate owned [REO]) were increased in order to better reflect recently observed loss severity trends for the transactions under review. Average loss expectations were generally lower than those of the prior S&D sector review, creating positive rating pressure.
Fitch's U.S. RMBS Loan Loss Model is currently undergoing its annual review. Anticipated model enhancements are expected to result in modestly lower loss expectations on average, but a small proportion of pools may see a moderate increase in loss expectations. In order to protect against the risk of higher future loss expectations, ratings on classes that were eligible for upgrades of more than one category were limited to one rating category. Four classes were affected by the one-category upgrade cap.
A detailed list of Fitch's updated probability of default (PD), loss severity (LS), and expected loss (XL) can be found by performing a title search for 'U.S. RMBS Loss Metrics' at www.fitchratings.com. The report provides a summary of base-case and stressed scenario projections.
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.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.