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Fitch Expects 'Resilience' From RMBS Performance

Fitch Ratings expects the structured finance market to show resilience this year, although some sectors may remain weak.

The good news is that the mortgage sector remains the strongest performer in the structured finance marketplace.

Overall, Fitch reported that upgrades of U.S. structured finance ratings exceeded downgrades by 5.4% last year, but the upgrades were heavily concentrated among deals backed by prime credit quality residential mortgage loans.

"This contrast reflects the divergent trend between the U.S. residential mortgage-backed securities and almost all other structured finance sectors," said Claire Mezzanotte, a managing director at Fitch.

A favorable interest rate environment and home price appreciation bolstered the performance of residential MBS, Fitch said. However, these factors are likely to be less favorable going forward, according to the rating agency.

While the outlook for prime mortgages remains favorable, Fitch was more cautious in assessing other aspects of the mortgage market.

"The outlook for Alt-A securities is generally stable, but the results are expected to vary by issuer, at times significantly," the Fitch report on the structured finance outlook for 2003 said. Historically, Alt-A pools have shown a "much wider dispersion in credit performance" between issuers than for prime quality jumbo mortgage pools, Fitch said.

"In contrast, subprime delinquencies are expected to increase modestly, as economic growth remains sluggish."

Stable-to-improving housing markets and "continuing improvements in loan servicing" should prevent loss severity from increasing on subprime loans, Fitch said, predicting that ratings on deals backed by subprime loans will remain stable.

However, Fitch said that "high delinquencies, high-loss severities, and corporate financial concerns for manufactured housing originators should continue" this year. As a result, many classes of securities backed by manufactured housing loans will likely be downgraded. In addition, a glut of repossessed homes on the market will keep the loss severity rate "extremely high" for transactions backed by manufactured home loans.

Manufactured housing accounted for 72% of downgrades involving residential MBS classes last year, Fitch reported.

Fitch predicts that prime quality jumbo mortgage delinquency rates and losses "should remain unchanged or decline slightly." Refinancing will continue apace, resulting in rapid prepayment on pools originated before 2002.

The subordinate classes of jumbo mortgage deals will benefit from the "faster deleveraging process" as the pools pay down, Fitch said.

In the commercial mortgage-backed securities world, diversification and strong transaction structures are expected to mitigate generally negative expectations for most property types, Fitch said.

While Fitch rates industrial properties as a stable sector, it is more cautious about the outlook for multifamily, retail, office and hotel properties.

Transactions backed by multiple borrowers "are generally well diversified by property type and location," making them less vulnerable to deterioration in one sector or geographic area, Fitch said.

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