WE’RE HEARING the massive waves of legacy 2005-2007 residential mortgage-backed securities downgrades have finally calmed down a bit, thanks largely to housing market improvement.
Also, while older vintages of RMBS with better underwriting such as 2002 and 2003 have been experiencing adverse selection as borrowers refinanced out of pools, there has been an opposite trend when it comes to 2005-2007 RMBS.
Often borrowers from those pools, outside of what occurs due to special refinancing or modification programs, do not refinance out of them. Rather, borrowers with payment problems leave RMBS pools due to foreclosure and property liquidations.
As a result, Grant Bailey, a managing director in Fitch’s RMBS group, tells us some bonds from those vintages are benefitting not only from the housing market but also from some positive selection that leaves the better borrowers in the pool rather than the worse ones, although they still face other risks.
These vintages currently account for roughly 85% of the outstanding private-label RMBS market, which CoreLogic’s LoanPerformance data show is now a little under $900 million in size.
Fitch has upgraded about 480 outstanding RMBS bonds across all vintages year-to-date, and positive outlooks have been placed on approximately 800, but these represent only a small percentage of its monitored securities and are not necessarily 2005-2007 bonds.
In cases where deals make payments to senior-most investors first, those senior-most classes with priority payments are most likely to find themselves benefiting ratings-wise from the relative improvement in market conditions, Bailey notes. As a result, Fitch finds in its report that classes with a positive outlook “are disproportionately concentrated in ReREMICs issues since the start of 2010, seasoned manufactured housing transactions and subprime deals issued between 2003 and 2005.” According to Bailey, based on the relative age and payment priority of the transaction these are currently senior tranches or senior-most mezzanine tranches.
“The collateral performance has generally improved, but it hasn’t improved enough to warrant broad upgrade activity just yet,” Bailey tells us.
The extent of the upgrades in the 2005-2007 vintages is limited by, among other things, the fact that Fitch’s criteria as well as underwriting criteria has tightened over time, Bailey notes. Also Fitch does consider
Other continuing U.S. RMBS concerns Fitch is watching also include still-high delinquency pipelines, and a high percentage of borrowers who are underwater on their mortgages.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.
