Fitch Streamlines and Revamps Foreclosure and Loss Model

Fitch Ratings has updated its model for forecasting foreclosure frequency and loss severity on loans pooled into residential mortgage-backed securities.

Fitch officials said the new models reflect an increasing availability of mortgage data and changing underwriting practices. Fitch's foreclosure and loss model last saw a major update in 1998.

The new loan level model, version 5.0, evaluates frequency of foreclosure and loss severity based on individual loan characteristics and regional economic forecasts. Fitch says the new model is "less granular and more refined" than the previous model, designating four different categories of loan documentation rather than the previous 11, Fitch said.

Susan Kulakowski, a senior director at Fitch Ratings, said that research indicated the additional segmentation of loans by level of documentation was not adding value to its analysis. She said using just four documentation categories - full documentation, alternative, reduced and none - provides a more transparent methodology, making it easier for investors and issuers to understand the treatment of loans in different categories.

The documentation categories represent data about income, employment, asset and housing payment history.

"The fine distinctions that we were making were not worthwhile," she told MSN. "We are trying to open the box as much as possible, and simple is better."

On the other hand, the greater availability of credit score data about loans in MBS has allowed Fitch to refine the model, she said.

Loan size and property type are also key factors in analyzing the risk of foreclosure and loss, she said.

Sarbashis Gosh, a senior director who recently joined Fitch from Freddie Mac, said that the documentation categories are just part of a larger default risk puzzle, with loan-to-value ratios and borrower credit scores being the most important factors in evaluating the likelihood of foreclosure and loss.

He said the four documentation categories are "a supplemental tool" to better assess overall risk.

"With the passage of time you have more data to look at," he said, adding that Fitch plans to make additional improvements to the model.

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