OREANDA-NEWS. Fitch Ratings says that the investment loan reclassification process announced today by National Australia Bank Limited (NAB, AA-/Stable/F1+) will not result in a withdrawal or downgrade of Fitch's ratings on the National RMBS Trust notes and outstanding issuance under NAB's mortgage covered bond programme. The reclassification process has been initiated following a review of NAB's housing loan purpose data which found misclassifications between 'owner occupied' and 'investment'. The full list of ratings follows at the end of this commentary.

Fitch believes that investment-property loans will have a higher probability of default in an economic downturn, as borrowers will fight harder to protect their primary residence. The agency applies a 25% higher base default probability in the case of a mortgage collateralised by an investment property, compared with an owner-occupied property.

However, Fitch has tested the sensitivity of the ratings to an increase in the proportion of loans collateralised by investment properties. The analysis found that the RMBS notes' and mortgage covered bond ratings are not impacted by an increase in expected foreclosure frequency following the increase of loans classified as investment loans in each of the rated transactions. The levels of credit enhancement (CE) available to each rated note issued under the National RMBS transactions would still be above Fitch's adjusted break-even CE levels. The transactions are performing within expectations with low levels of arrears and losses.

The change of the proportion of investment loans in the cover pool would not impact Fitch's 'AAA' break-even asset percentage (AP) of 89.5% on NAB's mortgage covered bond programme. The 'AAA' break-even AP calculated by Fitch is mainly driven by the programme's refinancing needs as a result of significant maturity mismatches and the agency's refinancing assumptions.

NAB has stated that new procedures are being implemented and that identified gaps in data capturing have been rectified. This work forms part of an ongoing review to improve its statistical reporting process. Fitch has and will adjust its analysis assumptions on the National RMBS transactions and the NAB mortgage covered bond programme to reflect the ongoing work.

The affected RMBS transactions are securitisations of first-ranking Australian residential mortgages originated by Advantedge Financial Services Pty Limited and Challenger Mortgage Management Pty Limited: National 2011-1, National 2012-1 and National 2012-2; and National Australia Bank Limited (NAB, AA-/Stable/F1+): National 2011-2 and National 2015-1.

The ratings are as follows:

National RMBS Trust 2011-1 (balances as at August 2015):
AUD148.0m Class A1 (ISIN AU0000NAHA8): 'AAAsf'; Outlook Stable;
AUD137.3m Class A2-R (ISIN AU0000NAFB6): 'AAAsf'; Outlook Stable; and
AUD17.1m Class B (ISIN AU3FN0013272): 'AAAsf'; Outlook Stable.

National RMBS Trust 2011-2 (as at August 2015):
AUD209.7m Class A1-R (ISIN AU0000NAOHC6): 'AAAsf'; Outlook Stable;
AUD231.2m Class A2 (ISIN AU0000NABHD1): 'AAAsf'; Outlook Stable; and
AUD52.0m Class B (ISIN AU3FN0014221): 'A+sf'; Outlook Stable.

National RMBS Trust 2012-1 (as at July 2015):
AUD14,835.3m Class A notes: 'AAAsf'; Outlook Stable.

National RMBS Trust 2012-2 (as at July 2015):
AUD301.2m Class A1 (ISIN AU0000NAHHA4): 'AAAsf'; Outlook Stable; and
GBP85.0m Class A2 (ISIN XS0864194591): 'AAAsf'; Outlook Stable.

National RMBS Trust 2015-1 (as at August 2015):
AUD1,432.2m Class A (ISIN AU0000NAJHA0): 'AAAsf'; Outlook Stable; and
AUD105.0m Class B (ISIN AU3FN0026506): 'A+sf'; Outlook Stable.

National Australia Bank's mortgage covered bonds: 'AAA'; Outlook Stable.