Fitch Upgrades 6 Tranches of Marble Arch RMBS Series; Affirms 9
OREANDA-NEWS. Fitch Ratings has upgraded six and affirmed nine tranches of Marble Arch Residential Securitisation Ltd No 3 (MARS 3) and Marble Arch Residential Securitisation Ltd No 4 (MARS 4). A full list of rating actions is at the end of this rating action commentary.
The two transactions comprise UK non-conforming residential mortgages originated by Matlock Bank for MARS 3 and the London Mortgage Company and London Personal Loans Limited for MARS 4.
KEY RATING DRIVERS
Strong Credit Enhancement (CE)
The combination of sequential amortisation and non-amortising reserve funds has led to a substantial build-up in CE available to the senior notes; 63.9% for MARS 3 and 84.9% for MARS 4. The agency deems the current CE to be sufficient to withstand the 'AAAsf' rating stresses applied in its analysis, as reflected by the affirmation.
For MARS 3's class M2 and B notes and MARS 4's class C and D notes of, Fitch notes the build-up in CE over the past 12 months allows the notes to sustain stresses associated with higher ratings, leading to the upgrades.
The issuers have reported stable asset performance over the past year. Loans in arrears by more than three months, excluding loans with properties in possession increased to 24% from 21.9% and to 14.6% from 14.4% over the past 12 months for MARS 3 and 4, respectively. The increase in the proportion of loans in late stage arrears in MARS 3 is driven by the small collateral pool and a small number of new mortgages entering the three months plus arrears stage. The build-up in late-stage arrears is driven by the servicer's decision to apply more stringent foreclosure practices. This is also evident from the marginal increase in the outstanding balance of loans associated with properties taken into possession as a proportion of the original collateral balance, which in the past 12 months went up to 15.3% from 15.2% in MARS 3 and to 11.8% from 11.6% in MARS 4.
Unhedged Interest Rate Risk
MARS 4's notes are exposed to basis risk due to 88% of the collateral paying a variable rate linked to BBR, while the notes pay an interest linked to three month Libor. There is no swap in place to hedge this risk. Fitch accounted for the unhedged basis risk by reducing the excess spread generated by the BBR-linked portions of the portfolio.
The transactions are backed by floating-interest-rate loans. In the current low interest rate environment, borrowers are benefiting from low borrowing costs. An increase in interest rates could lead to performance deterioration of the underlying assets and consequently downgrades of the notes if defaults and associated losses exceed those of Fitch's stresses.
As the reserve fund is the only source of CE for MARS 3's class B notes, the rating of the notes is now capped at the Long-term Issuer Default Rating of the account bank (Barclays Bank plc); currently implying a cap of 'A'/Stable.
Fitch published an exposure draft for UK residential mortgage assumptions on 22 September 2015 (https://www.fitchratings.com/creditdesk/reports/report_frame_render.cfm?rpt_id=871376).
The proposed criteria, if adopted, will lead to smaller loss expectations for all types of mortgage portfolios. As a result, Fitch expects all outstanding UK RMBS and covered bond ratings to either be affirmed or upgraded. If the current criteria are updated after considering market feedback, Fitch will review all existing UK RMBS ratings within six months of the new criteria publication.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
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 pools ahead of the transactions' initial closing. The subsequent performance of the transactions 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.
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.
SOURCES OF INFORMATION
The information below was used in the analysis.
-Loan-by-loan data provided by Acenden Mortgage Services Solutions with a cut-off dates of 31 August 2015 for both deals.
-Transaction reporting provided by Acenden Mortgage Services Solutions since the close of the deals and until September 2015 in both deals.