OREANDA-NEWS. Fitch Ratings has affirmed 10 tranches of two Hermes transactions. A full list of rating actions is available at the end of this commentary.

The mortgages in the two transactions were originated and are serviced by SNS Bank N.V. (SNS, BBB/Stable/F3) and its subsidiaries Regio Bank and BLG. The portfolio in Hermes XVIII comprises 70.2% of loans benefiting from the national mortgage guarantee scheme (Nationale Hypotheek Garantie or NHG).

KEY RATING DRIVERS
Diverging Asset Performance
The performance of the loans in Hermes XII has improved over the last one year with loans in arrears by three months or more decreasing to 1.2% of the current portfolio balance from 2%. Nevertheless, late-stage arrears are among the highest across the Dutch prime RMBS transactions rated by Fitch. The majority of outstanding arrears cases are reported to have six or more unpaid instalments.

In contrast, Hermes XVIII continues to report a limited volume of loans in arrears by three months or more. As of end-June 2015 late-stage arrears were at 0.2% of the current portfolio balance, below the Dutch NHG index of 0.5%. The improved performance of the transaction is reflected in today's affirmation and can be attributed to the tightened lending standards of SNS since 2008.

At transaction close in 2006 (Hermes XII) and 2013 (XVIII), Fitch applied a lender adjustment to both transactions to address the limited historical performance data available. These lender adjustments were also used in today's performance review. Because the underlying loans in Hermes XII have outperformed Fitch's expectations, the lender adjustment was offset by a performance adjustment factor, which in turn reduced the base foreclosure frequency (FF) of this deal. Fitch does not give credit to outperformance of expectations reported by the issuer for the first three years of a transaction's life; therefore the performance adjustment factor had no effect in the analysis of Hermes XVIII.

NHG-Guaranteed Loans
Fitch did not apply a reduction in its base FF for the NHG portion in the portfolios, as SNS was unable to provide data that would support such an adjustment.

Fitch did not receive any up-to-date WEW compliance data for SNS. Thus, the historically determined compliance ratio of 80% was applied to the rating scenarios above SNS's rating of 'BBBsf', which is lower than the market average (85%) observed by Fitch.

In its analysis of both deals Fitch gave credit to the repurchase commitment from SNS to buy back non-compliant loans in the portfolio by applying a 100% compliance ratio in the rating scenarios below and including 'BBBsf'.

Geographical Concentration
Almost 18% of the loans in Hermes XVIII are secured by properties located in the province of Limburg. The province accounts for 6.9% of the total Dutch population and its economy is assumed to be less diversified and more prone to regional downturns. As per Fitch's criteria the agency has increased by 15% its base FF to account for portfolio concentration that exceeds twice the regional population. This increase in the base FF has had no effect on the ratings of the notes.

Insurance Set-Off
The mortgages backed by capital insurance policies are exposed to the risk that, upon insolvency of the policy providers, borrowers may seek to set-off against their mortgages the claim over the insurance provider resulting from a loss of premium or damages. Further to this, borrowers could seek to exercise defences following the insolvency of their insurance provider and request cancellation of parts of the loans corresponding to the lost capital. Fitch incorporated in its analysis the risk the borrowers might exercise such defences following the failure of insurance providers. The agency estimated the set-off exposure and accounted for the exposure in the EMEA RMBS Surveillance Model.

IO Concentration
Fitch has analysed the concentration of interest-only (IO) loan maturities to assess the effect of a period of limited lending availability coinciding with a significant proportion of expected bullet repayments. In both transactions, the IO loans maturing within three years account for more than 20% of the portfolio balance. To account for this risk a sensitivity analysis was conducted, by increasing the FF on the concentrated portion of loans to 50%. The ratings implied by the sensitivity analysis were not considered substantially different, thus no adjustment to the ratings was made.

Partial Swap
The interest rate swap in place in Hermes XVIII only covers the A1 and A2 floating rate notes. There is no hedging agreement in place with respect to the fixed rate of interest payable on the class A3 notes. Fitch has tested the structure for possible mortgage interest rate type migrations as well as reductions in the mortgage interest margins. The analysis showed that the structure is sufficiently resistant to absorb the stresses.

RATING SENSITIVITIES
Deterioration in asset performance may result from economic factors. A corresponding increase in new foreclosures and the associated pressure on excess spread, reserve fund and the liquidity facility beyond Fitch's assumptions could lead to negative rating action.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pool ahead of Hermes XII's initial closing. The subsequent performance of the transaction over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Prior to Hermes XVIII's closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.

Prior to Hermes XVIII's closing, Fitch conducted a review of a small targeted sample of SNS'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.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

Models
The models below were used in the analysis. Click on the link for a description of the model.
ResiEMEA
EMEA RMBS Surveillance Model

Fitch has taken the following ratings:

Holland Mortgage Backed Series (Hermes) XII B.V.
Class A (XS0271028838) affirmed at 'AAAsf'; Outlook Stable
Class B (XS0271029059) affirmed at 'AAsf'; Outlook Stable
Class C (XS0271029133) affirmed at 'BBB+sf'; Outlook Stable
Class D (XS0271029489) affirmed at 'BBsf'; Outlook Stable

Holland Mortgage Backed Series (Hermes) XVIII B.V.
Class A1 (XS0826174269) affirmed at 'AAAsf'; Outlook Stable
Class A2 (XS0826174772) affirmed at 'AAAsf'; Outlook Stable
Class A3 (XS0826176637) affirmed at 'AAAsf'; Outlook Stable
Class B (XS0826177361) affirmed at 'AAsf'; Outlook Stable
Class C (XS0826177528) affirmed at 'BBB+sf'; Outlook Stable
Class D (XS0826177791) affirmed at 'BBBsf'; Outlook Stable.