Fitch Announces Criteria for Analyzing Non-Performing Loan RMBS

NEW YORK--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: U.S. RMBS Non-Performing Loan Criteriahttps://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885982

Fitch Ratings has finalized its approach for rating residential mortgage-backed securities (RMBS) backed by non-performing loans (NPLs). The proposed criteria are detailed in its criteria report published today. Fitch defines NPLs as loans that are 60 days or more delinquent (DQ) and considers a transaction as an NPL RMBS if more than 10% of the collateral comprises 60+ days DQ at issuance.

Fitch's approach to analyzing NPL RMBS leverages its U.S. RMBS Seasoned and Re-performing Loan Criteria with respect to loan file documentation, due diligence review scope and sample size, and representations and warranties. However, due to the idiosyncratic and adverse-selection risk, Fitch applies a rating cap of 'Asf' to NPL RMBS and expects a number of structural features, such as a sequential pay structure and application of available funds to pay interest to the rated notes.

Fitch assumes a 100% probability of default for NPL loans and loss severity is determined based on the loan's current property value, Fitch's model-projected sustainable market value decline, property liquidation assumptions, and a distressed sale discount.

A key distinction between Fitch's NPL rating approach and that used for re-performing loans is its cash flow analysis. For NPLs, Fitch applies a transition rate approach where the transition rates from one DQ status to another are decreased for a period of time to delay liquidation timing for stress scenario analysis.

Additional information is available at 'www.fitchratings.com'.

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Source: Fitch Ratings

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