OREANDA-NEWS. Fitch Ratings has assigned Bluestep Mortgages Securities No. 3 Limited's notes expected ratings, as follows:

Class Aa: 'AAA(EXP)sf', Outlook Stable
Class Ab: 'AAA(EXP)sf', Outlook Stable
Class B: 'A+(EXP)sf', Outlook Stable
Class Z: not rated

The final ratings are subject to the receipt of final documents conforming to information already received.

The transaction is a securitisation of Swedish non-conforming residential mortgage loans originated by Bluestep Bostadslan AB (BBAB) and Bluestep Finans AB (BFAB; together Bluestep). Bluestep Servicing AB will service the loans with Emric Operations AB acting as back-up.

Initial credit enhancement for the class Aa and Ab notes at 20.67% will be provided by the subordination of the class B to class Z notes, and the credit portion of the general reserve fund.

KEY RATING DRIVERS
Swedish Non-conforming Loans
Bluestep is the largest non-conforming lender in Sweden with a market share of about 90%. It targets borrowers unable to obtain a mortgage from the main Swedish banks, typically due to a weak credit record and/or difficulty in proving income. As a result, a significant portion of the pool is made up of borrowers with self-certified income (38%) and/or some adverse credit (56%; these are borrowers with either registered arrears or debt amounts being enforced by the central government collection agency).

High House Prices
Sweden has seen almost continuous house price growth in the last 15 years. Fitch has taken this into account in its house price decline assumption.

Relatively Strong Performance
In its analysis Fitch compared the performance of Bluestep with the UK non-conforming sector. Bluestep's mortgage performance was better than the average for pre-crisis originated UK non-conforming. The 90+ arrears peaked at lower levels and repossessions have also been lower. Bluestep 1, for example, which closed in December 2006, has repossessions of 5.4% to date, which is lower than for similar vintage deals in the UK. Fitch has assumed a 'B' frequency of foreclosure of 11% for this pool.

Asset Yields May Fall
Fitch has assumed a reduction in asset yields in its cash flow analysis. Currently, 76% of the pool is paying a fixed rate and 24% is paying a variable rate. The variable-rate loans are unhedged and are based on a Bluestep reference rate which Bluestep may change at its discretion. The split between fixed and variable may also change, as borrowers switch from one interest-rate type to another. Borrowers are also promised a rate reduction following three years of clean payment history.

36% Housing Association Loans
Swedish borrowers purchase a flat by buying a share in a housing association. There is a risk that a housing association default could affect the overall default probability as well as recoveries on these loans. However, the historical rate of housing association defaults has been very low, and given the non-conforming nature of borrowers in the pool, it is more likely defaults will be driven by the borrower defaulting. Hence Fitch has not accounted for housing association defaults in its analysis.

Data provided by Bluestep indicates that Bluestep borrowers with housing association loans have performed worse than mortgages on single-family homes. Hence Fitch applied a 30% increase to the default probabilities for these loans.

RATING SENSITIVITIES
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case expectations, which in turn may result in potential negative rating actions on the notes. Fitch's analysis revealed that a 30% increase in the weighted average (WA) foreclosure frequency, along with a 30% decrease in the WA recovery rate, would result in a model-implied downgrade of the class A notes to 'Asf' from 'AAAsf' and a model-implied downgrade of the class B notes to 'BBB+sf' from 'A+sf'.

More detailed model implied ratings sensitivity can be found in the presale report which will be available at www.fitchratings.com shortly.

CRITERIA, MODEL AND DATA ADEQUACY
Bluestep provided Fitch with detailed month-by-month performance information at loan level for each of the 24,409 mortgage loans originated by Bluestep to date. The data included the loan, borrower, and property characteristics along with payment history for the loan on a monthly basis since origination, including an indicator for any arrears, default, prepayment or redemption of the loans. The foreclosure frequency (FF) assumptions for this portfolio have been determined based on this performance information as well as looking at the performance of previous Bluestep RMBS and benchmarking the performance of Bluestep originated mortgages with UK non-conforming sector. Regression analysis based on the loan level data was the primary driver for adjustments to the WAFF for various borrower, product and loan characteristics. More details on the BlueStep assumptions are available in the presale report.

Bluestep provided Fitch with a loan-by-loan and borrower-level data template. All relevant fields were provided in the data tape.

Bluestep provided Fitch with data on all 823 properties repossessed to date. Fitch used the data to calculate the experienced quick sale assumption on Bluestep's mortgage book, which it used to inform the QSA assumption for the transaction analysis.

Fitch visited the Bluestep offices on 5 March 2014 with an update call on 23 April 2015. During the site visit, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.

Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated errors or missing data related to the income certification information. These findings were immaterial to this analysis, as set out more fully in the presale report.

Overall and together with the assumptions referred to above, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

To analyse the credit enhancement levels, Fitch evaluated the collateral using its default model ResiEMEA. Fitch amended its ResiEMEA model to apply Bluestep-specific adjustments to the pool. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that each class of notes could withstand loan losses at a level corresponding to the related stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.

Models
The models below were used in the analysis. Click on the link for a description of the model.
ResiEMEA
http://www.fitchratings.com/jsp/creditdesk/ToolsAndModels.faces?context=2&detail=135

EMEA Cash Flow Model
http://www.fitchratings.com/web_content/pages/sf/emea-cash-flow-model.htm

Sources of Information
- The information below was used in the analysis.
- Loan-by-loan data provided by Bluestep as at 28 February 2015.
- Transaction reporting provided by Bluestep for BlueStep Mortgage Securitites No. 2 Limited as at 12 January 2015, and for BlueStep Mortgage Securities No. 1 Limited as at 9 February 2015.
- Loan enforcement details provided by Bluestep as at 20 January 2015.
Payment strings for entire mortgage book provided by Bluestep as at 19 March 2015.
- Swedish house price information from the Statistics Sweden website as at 20 January 2015.

A comparison of the transaction's Representations, Warranties & Enforcement Mechanisms to those typical for that asset class is available by accessing the appendix that accompanies the presale report (see " Bluestep Mortgages Securities No. 3 Limited - Appendix", at www.fitchratings.com).