Fitch Revises U.S. Subprime RMBS Surveillance
New York-Fitch Ratings has updated at least two of its market watch tools aiming to further improve subprime loan data analytics accuracy.
The ratings agency said its surveillance methodology for U.S. subprime residential mortgage-backed securities has been revised "to reflect an added emphasis on its loan-level default and loss model, ResiLogic."
In addition, Fitch has updated the average cumulative loss projections, as a percentage of the initial securitized balance, for its subprime RMBS "so they can reflect both deteriorating performance and the new criteria revisions."
RMBS loss expectations for 2005, 2006 and 2007 vintage transactions were 12%, 27% and 31%, respectively.
After reviewing rated transactions from these vintages Fitch will release updated ratings. The ratings agency noted, however, that the expanded use of ResiLogic for current and delinquent mortgages helps to estimate the "B" base-case mortgage pool expected loss is based on enhancements made to ResiLogic that were initially announced in July 2008.
Before the aforementioned enhancements took effect, Fitch said, "the use of loan-level analysis in subprime surveillance was limited to loss severity projections for mortgage pools seasoned less than 24 months."
Going forward, ResiLogic will be used to guide collateral loss projections. Pools seasoned less than 30 months will be evaluated by estimating the frequency of foreclosure for all pools regardless of seasoning, and the loss severity. As to pools seasoned over 30 months, "actual loss severity trends exhibited by these pools are the best indicator of future severity trends," Fitch said.
Fitch will use the same loan-level analysis in existing break loss analysis to determine each bonds loss coverage ratio.
Additionally, Fitch will also rely on ResiLogic's stressed mortgage pool loss scenarios to determine specific loss indicators for each rating category so that results are "pool-specific rating category thresholds" that differ from the static set of thresholds Fitch has used when rating subprime pools in the past year.
Methodology updates also include an adjustment to the ResiLogic default rates for performing loans to account for the actual performance compared to original expectations. Plus, Fitch will take advantage of and use historical loan-level loss severity data when analyzing pools of loans that are seasoned for a period greater than 30 months.
The reason behind these modifications to the existing methodology, Fitch explained in a company release, is to allow for "a more forward-looking analytical process" that helps to better align loss expectations with the collateral risk and market conditions.
Fitch said its revised cumulative loss expectations for 2005, 2006 and 2007 vintage transactions were adjusted to the current 12%, 27% and 31%, respectively. Furthermore, Fitch projected the frequency of foreclosure for the remaining 2005, 2006 and 2007 pools is 49%, 60% and 52%, respectively. The loss severity expectations are 61% for 2005, 65% for 2006, and 66% for 2007.
The ratings agency also reported the product of the frequency of foreclosure and loss severity assumptions yields loss expectations of 30%, 39% and 34% as a percentage of the remaining balance of each vintage, respectively.