Fitch Rises Subprime RMBS Loss Expectations
Worsening mortgage performance across the marketplace is affecting ratings.
Following a significant deterioration of U.S. subprime mortgage performance over the last several months, Fitch Ratings has adjusted its subprime RMBS loss projections and attributed it to accelerating home price declines in part due to the dramatic contraction in the mortgage origination and securitization markets.
Fitch has also increased its loss expectations for U.S. subprime RMBS backed predominately by first-lien mortgages originated in 2006 and the first half of 2007.
The average cumulative loss expectations, as a percentage of the initial securitized balance, are now 21% and 26%. Accordingly, Fitch has placed approximately $139 billion, of 2006 and 2007 subprime RMBS (comprised of 2,972 rated classes) on rating watch negative.
Fitch's new loss expectations are based on projection of three major variables, including the percentage of delinquent loans that are expected to default, the percentage of currently performing loans that are expected to default, and the severity of loss upon liquidation of defaulted loans.
Mortgage performance in each of these areas has deteriorated. The contraction in the mortgage markets has contributed to an acceleration and deepening of home price declines, and has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Additionally, the apparent willingness of borrowers to 'walk away' from mortgage debt has contributed to extraordinarily high levels of early default, which is particularly noticeable in the 2007 vintage mortgages.
As Fitch has described in recent research reports, this behavior appears to be largely attributable to the use of high risk mortgage products such as 'piggy-back' second liens and stated-income documentation programs, which in many instances were poorly underwritten and susceptible to borrower/broker fraud.
The increase in Fitch's loss expectation is driven by both expectations of higher mortgage defaults (aka Frequency of Foreclosure or FOF) and expectations of worsening loss severity (LS) on defaulted loans.
The higher default expectations reflect both increased likelihood that delinquent loans will default, and high rates of deteriorating performance among loans that have been current on payments. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/