Fitch Places 6 Classes from 2006-2007 Vintage Reverse Mortgage U.S. RMBS on Rating Watch Negative
OREANDA-NEWS. Fitch Ratings has placed the ratings of six classes from two jumbo reverse mortgage transactions issued in 2006 and 2007 on Rating Watch Negative due to a model correction. A spreadsheet detailing Fitch's rating actions can be found at 'www.fitchratings.com' by performing a title search for 'U.S. RMBS Reverse Mortgage Rating Watch Actions for April 7, 2016'.
KEY RATING DRIVERS
The required model correction was identified through a model validation review of the U.S. reverse mortgage model. The correction will affect the initial indexation of the property values, the projected accrued interest, projected costs and the projected liquidation timelines.
The model correction potentially affects ratings in two seasoned jumbo reverse mortgage transactions issued in 2006 and 2007. Ratings on the classes currently range from 'BBBsf' to 'Bsf.' The Outlook for all of the current ratings was Negative prior to today's placement on Negative Watch. After the model correction, preliminary model-indicated ratings range from 'Bsf' to 'CCCsf.'
For reverse mortgage transactions, Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'Asf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 25% decline in the 'Asf' scenario.
Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.
The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.