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Fitch Offers New Foreclosure and Loss Severity Estimates

Fitch Ratings has revised its surveillance methodology for evaluating subprime residential mortgage-backed securities to reflect higher loss expectations on loans originated between 2005 and 2007.

Fitch now expects more than half of the remaining loans in subprime RMBS from those years to go into foreclosure. Specifically, Fitch predicts that of the remaining loans in transactions from 2005, 2006 and 2007, the share that will go into foreclosure is 49%, 60% and 52%, respectively. When loss severity is added to the equation, Fitch estimates that investors will lose 30% of the remaining principal balance on 2005 transactions, 39% on 2006 transactions and 34% on 2007 transactions.

Fitch says the changes reflect enhancements to its ResiLogic loss model, changes that no doubt reflect the deteriorating housing market and weak loan performance. The changes mean that the updated surveillance will include more granular, loan-level analysis for older loan pools as well as newer ones. Fitch has realized that "past is prologue," as the old saying goes. For loan pools seasoned more than 30 months, the rating agency believes actual loss severity trends experienced in the deals are "the best indicator of future severity trends."

In addition, the new model includes integration of "dynamic model derived targeted loss multiples for each rating category." That dynamic model considers the loan pool's base case loss expectation when considering different rating stresses, Fitch said.

Fitch says that using the actual performance to project future losses on less-seasoned pools is unreliable, because data may be skewed by "an abundance of early defaults and losses" associated with second liens that would skew the trends and projections for the rest of the pool.