Fitch Releases Exposure Draft for U.S. RMBS Loan Loss Model Criteria
OREANDA-NEWS. Fitch Ratings has announced several proposed enhancements to its U.S. RMBS Loan Loss Model Criteria. The changes are detailed in an exposure draft published today. Fitch is inviting feedback on its proposed approach.
Fitch conducts a reassessment of its loan loss model annually to review the reasonableness of assumptions. This review incorporates new available data into the model analysis and updates backtesting of model projections to consider adjustments to existing assumptions. Fitch often makes revisions to the assumptions as part of the annual reassessment.
The model's core methodology has not materially changed. The key proposed enhancements include:
--A revision to the distressed sale adjustment to reflect new GSE historical data;
--A cure-rate adjustment for borrowers that default but have enough equity to resolve the default without a loss;
--A simplification of the liquidation timeline projections and stresses;
--Modest changes to originator quality adjustments; and
--A reduction in the geographic concentration penalty.
The effect of the proposed revisions on loss projections and ratings is expected to generally be modest, although the changes will have different implications for certain credit attributes. No rating implications are expected for outstanding bonds issued since 2009.
The most meaningful positive implication of the changes is expected to be a lower default assumption for borrowers with strong equity positions due to a cure-rate adjustment. The most meaningful negative implication of the changes is expected to be higher loss severities for prime conforming balance loans due to an increase in the distressed sale adjustment. The implications of all other changes are expected to be more modest or to affect a smaller number of transactions.