Fitch, S&P Revise Criteria

With the housing market starting to cool and new loan products gaining a foothold in the market, rating agencies have been busy revising criteria for evaluating the credit risk on deals.

Fitch Ratings recently updated its model for anticipating residential MBS loan defaults, known as ResiLogic.

Glenn Costello, managing director at Fitch, said Fitch is taking a new approach to regional housing markets with the new default model and residential MBS criteria. The study found strong tie-ins between mortgage defaults and combined loan-to-value ratios, FICO scores and market sectors, along with underwriting standards.

"It shouldn't come as a surprise that mortgage delinquency and loss has a strong inverse relationship with home price appreciation," Mr. Costello said during a conference call to discuss the new model. He said the research shows that servicers with better ratings have lower loss severities than other servicers.

Fitch analyzed some 1.6 million prime, alt-A and subprime mortgage loans originated between 1992 and 2000 in creating ResiLogic. That research yielded a few surprises.

For instance, 34% of prime loans liquidated after a default result in no loss at all, because equity from the home sale covers all outstanding loan interest and principal shortfalls.

About 16% of alt-A liquidations result in no loss, while only about 8% of subprime liquidations experience no loss, according to Fitch. Rising home prices of course contributed to the low loss rate on some liquidations.

Also, the research found that above the 70% LTV ratio, LTV has little impact on foreclosure frequency for subprime loans, a fact that Fitch officials say suggests that subprime borrowers make less rational use of "marginal equity" in their homes.

The new model incorporates regional data from University Financial Associates, Ann Arbor, Mich.

"We realized from looking at the lenders that had problems that there was a regional component that a lot of lenders were missing," said Dennis Cappoza, a principal at UFA, during the conference call.

In other rating agency news, Standard & Poor's recently said that it has developed new criteria for evaluating U.S. residential MBS loans with maturities greater than 40 years.

S&P said the popularity of longer-amortization loans reflects house price gains that have outpaced income gains in many areas, leading borrowers to select products that enable them to make a lower monthly payment.

In the subprime market, longer amortization schedules are often used as a substitute for interest-only loans, S&P said.

S&P's research found that 40-year loans behave more like a 50-year loan than a 30-year loan. However, S&P said that it does not expect the 40-year and greater loans to default significantly more than the 30-year loans strictly because of amortization. S&P said that 90.25% of defaults occur during the first five years of a loan's life cycle. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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