OREANDA-NEWS. Fitch Ratings says that global RMBS transactions backed by mortgages from new lenders need to be analysed cautiously as they pose a number of additional risks compared with transactions from more established lenders. Fitch has recently received multiple enquiries to rate transactions from new lenders and says that the lack of historical data is the main challenge.

Fitch typically expects to receive originator-specific historical performance data relevant to the securitised asset pool for the longer of five years or a period covering all phases of at least one economic cycle. A new lender is most likely not capable of producing historical performance data that conforms to this expectation. Where such data limitations exist, Fitch may, limit the ratings that are achievable, apply higher asset stresses or decide not to rate such a transaction at all. In order for such a transaction to achieve Fitch's highest ratings, strong mitigating factors would need to be present. Fitch's Criteria for Rating Caps and Limitations in Global Structured Finance Transactions, dated 28 May 2014 gives more details regarding Fitch's expectations.

The types of mitigants that Fitch may consider are outlined below:

PROXY DATA
While a new lender will likely not be able to produce sufficient historical performance data, it may be possible to consider alternative but comparable sets of performance data. Examples include data from lenders with consistent underwriting criteria or new lenders who operate with equally experienced staff and management as an established lender.

REGULATORY FRAMEWORK
Some products and jurisdictions have a very prescriptive and narrow regulatory environment around lending products. Fitch believes markets where regulators impose strict underwriting guidelines provide some support to use the data from other lenders, given the resulting homogeneity in the market. Strict regulatory guidance provides support when considering aspects such as leverage, consumer protection, affordability and credit history amongst others. The agency expects the strict regulatory environment to be in place over several years and to be supported by credit performance within Fitch's expectations.

3RD PARTY COLLABORATIONS
Fitch believes markets with a broad range of experienced market participants will benefit future asset performance - including the availability of large and experienced third party service providers such as large servicers, mortgage insurance providers or multi-lender origination platforms which originate mortgage loans with predefined and strict lending rules. Where Fitch has experience with these parties and believes their practices and service levels to be adequate, the agency will take comfort from such collaborations.

LENDER STRATEGY, EXPERIENCE AND INCENTIVE
Fitch will examine in detail a lender's strategy, its experience in other markets (both in underwriting and servicing), its reasons for commencing the lending programme and the overall experience of the key management and the staff. Incentives to maintain credit quality and ensure the portfolio performs as expected, such as performance triggers or put-back clauses, will be evaluated to ensure management interests are aligned with future investors.

Historically, mortgage lenders entering a new market have encountered issues when the growth of their loan book was exceeding that of their lending and servicing operations. Fitch will therefore examine the lenders' business plan, loan volume and performance projections, underwriting and servicing experience as well as the IT systems used. The agency believes new lenders with an experienced underwriting and servicing team and proven track record provides comfort - even if with a different lender.

Fitch expects to receive detailed information on the projected lending volumes, the number of full time equivalents (FTE) originating and servicing the portfolio and their industry experience. The agency will assess if the proposed growth strategy is commensurate with prudent lending volumes in the target market and monitor it on an ongoing basis.

LIMITED ELIGIBILITY CRITERIA
While it is unlikely that Fitch would be able to assign its highest ratings to transactions with revolving periods where the underlying collateral was originated by new lenders, there might be specific circumstances where such ratings could be assigned. Very strict loan eligibility and/or underwriting criteria which restrict the possible variability of a loan portfolio could be a mitigating factor in such situations as this could provide more comfort around assessing the future performance of the underlying portfolio.

EXTENSIVE OPERATIONAL REVIEW
For every new rating analysis, Fitch performs a detailed review of lender and servicer practices. When analysing RMBS transactions backed by new lenders, the scope as well as the level of scrutiny and diligence of this review will be intensified to ensure adherence with the underwriting guidelines and expected practices. As part of its operational review, Fitch will conduct an enhanced file review or rely on due diligence reports from acceptable third party companies to compare how the lender's underwriting criteria is applied in practice.

In the US, it is common practice for all or a substantial portion of the collateral of new originators to be reviewed by an independent third party due diligence provider. This provides additional comfort and insight regarding the quality of the originator's underwriting practices.

The above framework applies to individual requests from new lenders for standard mortgage products. Fitch may conduct a more detailed analysis for any of the additional points above if it is asked to review transactions backed by mortgage pools with lower credit quality. In its analysis the agency will also consider broader market dynamics and the implication of several new lenders coming into the market at once. Fitch will examine the implications of the different lenders' growth strategies on the sustainability of the individual businesses and the overall housing and mortgage market.