Fitch Reviews Legacy U.S. Alt-A and Subprime RMBS Transactions

NEW YORK--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: Fitch Reviews Legacy U.S. Alt-A and Subprime RMBS Transactionshttps://www.fitchratings.com/site/re/891559

Fitch Ratings has taken various rating actions on 11,827 classes from 1,738 U.S. Alt-A and Subprime RMBS transactions collateralized with mortgage loans originated prior to 2008. The summary of the ratings on the classes reviewed is as follows:

--73% affirmed;

--21% upgraded;

--4% downgraded;

--2% paid in full.

A spreadsheet detailing Fitch's rating actions can be found at 'www.fitchratings.com' by performing a title search for 'U.S. RMBS Alt-A and Subprime Rating Actions for Dec. 5, 2016'.

KEY RATING DRIVERS

The upgrades reflect an improvement in the relationship of credit enhancement (CE) to expected pool loss, and in particular, improved collateral performance in the subprime sector. The vast majority (89%) of the upgraded ratings are of classes in subprime transactions. The performance improvement has been driven by positive macroeconomic trends, such as stable home price growth and low unemployment, as well as positive selection among remaining subprime borrowers. The average 60+ day delinquency rate for subprime loans decreased about 3% over the last year, and is roughly half the peak 60+ DQ rate observed in 2009. Nearly all upgrades were one full rating category in magnitude; only 5% were greater than one rating category and none were greater than two categories. Classes upgraded to 'AAsf' and 'AAAsf' are expected to be paid in full within the next 24 months.

The number and extent of rating upgrades would have been higher in the subprime sector if it were not for interest shortfall risk. A number of subprime classes that benefit from significant CE face rating constraints due to existing or projected interest shortfalls. High rates of loan modifications and volatile servicer advancing practices create interest shortfall risk for many classes despite projected full principal recovery in high stress scenarios.

Roughly three quarters of the downgraded classes previously had distressed ratings; the rating actions on these classes reflect either a more imminent default or an observed default.

Downgrades among investment grade classes were disproportionately concentrated in Alt-A transactions backed by 15-year mortgage loans. While the performance of most 15-year loans has been positive, as the pools approach their maturity dates, loan balances and loan counts decline to a fraction of their original values. This exposes the pools to idiosyncratic loan loss rick, where a small number of underperforming loans can represent an increasingly large percentage of the remaining pool. In addition, loss severities on recently liquidated 15-year loans have been higher than expected, reflecting their adverse selection. The tail risk associated with legacy 15-year loan pools accounts for more than half of the investment grade downgrades. Among transactions backed by 30-year collateral, the most common driver of investment grade downgrades was rating caps associated with small remaining loans counts.

Thirty classes had their ratings withdrawn immediately following the rating action due to a weighted average number of loans (WAN) less than 10. In addition, the rating of one class was withdrawn due to lack of sufficient information to maintain the rating. The cash flows to the class in question come from prepayment penalty charges.

VARIATIONS FROM CRITERIA

The rating actions reflect several variations from Fitch's criteria, as described below.

--A number of non-investment grade classes that currently have existing interest shortfalls were upgraded, which is a variation from Fitch's criteria that limits upgrades on classes with existing interest shortfalls. In all cases, the classes were expected to recover their existing interest shortfalls, and their full remaining principal balance in the stressed scenario corresponding to the new rating. This variation resulted in 468 classes with a rating one full category higher (none higher than 'BBsf') than the rating would have been without the variation.

--A sensitivity analysis was conducted to identify classes exposed to high losses on small balance loans. This analysis was intended to address higher than expected loss severities on recently liquidated loans with balances under $100,000. Upgrades and positive outlooks were constrained on RMBS classes with meaningful exposure to higher losses on low-balance loans, relative to Fitch's model-derived losses. This variation resulted in 49 classes with a rating one full category lower than it would have been without the variation and one class with a rating 2 categories lower. In addition, 20 classes for which this variation had no impact on the long-term credit rating were assigned a stable outlook instead of a positive outlook.

--A separate sensitivity analysis was conducted to address the risk of RMBS exposure to higher-than-expected losses on a small number of underlying loans. This analysis was intended to address tail risk among pools with small remaining loan counts by ensuring each class' CE was sufficient to withstand losses from the largest delinquent loans in the pool. Using loss severities consistent with recently observed trends, the CE of classes rated 'Bsf' was tested against losses from the single largest DQ loan. The number of largest DQ loans was increased by one at each rating category stress, with 'AAAsf' ratings protected against losses from the six largest DQ loans. This variation resulted in 19 classes with a rating one full category lower than it would have been without the variation and 13 classes with a rating two categories lower.

--Upgrades were constrained on a small number of classes that were backed by pools with small remaining loan counts. This variation was intended to address the risk that the future prepayment behavior may be more volatile than the prepayment assumption driving the model-proposed upgrade. This variation resulted in 10 classes with a rating one full category lower than it would have been without the variation and two classes with a rating two categories lower.

--The downgrade of one class was constrained because the projected default occurs over 10 years in the future. This variation resulted in one class with a rating two full category higher than it would have been without the variation.

--The rating of one class for which a cash flow analysis was not available was downgraded further than the criteria-specified small pool rating cap and CE vs expected loss rating analysis would have suggested. In this unique circumstance, the 15-year loan pool has reached maturity, and all but one loan in foreclosure has exited the pool. This variation resulted in one class with a rating one full category lower than it would have been without the variation.

--The rating of one class was affirmed instead of downgraded, since the class has >98% CE. The proposed downgrade was related to a projected low remaining loan count, which is mitigated by the high CE. This variation resulted in one class with a rating one full category higher than it would have been without the variation.

--The rating of one distressed class was affirmed instead of upgraded to a less distressed rating, since the class is currently under-collateralized. This variation resulted in one class with a rating one full category lower than it would have been without the variation.

--The ratings of two classes were affirmed instead of upgraded, due to low remaining WAN and a high delinquency percentage relative to class CE. This variation resulted in two classes with a rating one full category lower than it would have been without the variation.

RATING SENSITIVITIES

Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.

In addition to increasing mortgage pool losses at each rating category to reflect increasingly stressful economic scenarios, Fitch analyzes various loss-timing, prepayment, loan modification, servicer advancing, and interest rate scenarios as part of the cash flow analysis. Each class is analyzed with 43 different combinations of loss, prepayment and interest rate projections.

Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.

The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Sources of Information:

As identified in Fitch's report 'US RMBS Surveillance and Re-REMIC Criteria', the sources of information used to assess these ratings include data provided by trustees, servicers, CoreLogic LoanPerformance and Intex Solutions, Inc.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)

https://www.fitchratings.com/site/re/888492

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)

https://www.fitchratings.com/site/re/882401

Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 08 Mar 2016)

https://www.fitchratings.com/site/re/878513

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)

https://www.fitchratings.com/site/re/864368

U.S. RMBS Cash Flow Analysis Criteria (pub. 15 Apr 2016)

https://www.fitchratings.com/site/re/880006

U.S. RMBS Loan Loss Model Criteria (pub. 29 Nov 2016)

https://www.fitchratings.com/site/re/889746

U.S. RMBS Master Rating Criteria (pub. 01 Dec 2016)

https://www.fitchratings.com/site/re/891440

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 15 Nov 2016)

https://www.fitchratings.com/site/re/888698

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015923

Endorsement Policy

https://www.fitchratings.com/regulatory

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View source version on businesswire.com: http://www.businesswire.com/news/home/20161205006388/en/

Fitch Ratings
Surveillance Analyst (Alt-A)
Susan Hosterman
Director
+1-212-908-0670
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Surveillance Analyst (Subprime)
Matthew Shaw
Associate Director
+1-212-908-0218
or
Committee Chairperson
Grant Bailey
Managing Director
+1-212-908-0544
or
Media Relations
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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