Fitch Reviews Reverse Mortgage RMBS Transactions

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms 12 classes and downgrades two classes in nine Reverse Mortgage RMBS transactions. The reviewed transactions were issued between 2005 and 2007.

In addition, Fitch also affirmed four classes from one Re-REMIC transaction and two classes from one subprime transaction. A spreadsheet detailing Fitch's rating actions can be found at 'www.fitchratings.com' by performing a title search for 'US RMBS Reverse Mortgage Rating Actions for May 28, 2015'.

KEY RATING DRIVERS

The reverse mortgage transactions in this review include six government-insured home equity conversion mortgage (HECM) transactions and three uninsured jumbo reverse mortgage transactions.

HECM are Federal Housing Administration (FHA) reverse-mortgage loans insured by the U.S. Department of Housing and Urban Development (HUD) and secured by one-to-four-family, first lien, residential properties. Unlike most forward mortgages, reverse mortgage loan balances can increase due to draws, accrued interest or incurred expenses. Servicers can assign the loan to HUD for repayment once the loan balance has increased to 98% of a maximum claim amount determined at origination.

The loans can experience a maturity event requiring repayment in full upon vacating the property or death. If a maturity event occurs prior to the servicer assigning the loan to HUD and the borrower or the borrower's estate is unable to repay the loan in full, the servicer may initiate foreclosure on the property.

If the foreclosed property becomes Real-Estate-Owned (REO) and remains in REO over six months, the insurance proceeds will be determined by the FHA based on a full appraisal of the property. If the property ultimately is sold for less than the appraised amount, the trust could experience unexpected uninsured losses.

Due to the stress experienced in the housing market over the past several years, an increased number of HECM loans are maturing in a negative equity position resulting in an increased number of foreclosures. The weak housing market has also resulted in an increased number of foreclosures ultimately becoming REO and taking longer than six months to liquidate. Historically, roughly 25% of non-agency loans which entered foreclosure ultimately liquidated after more than six months in REO.

To estimate the likelihood of uninsured losses from REO liquidations, Fitch assumed all loans in a negative equity position at the time of a maturity event will enter into foreclosure.

To determine a borrower's current equity position, Fitch used the original appraisal, adjusted to today's value with the Case-Shiller index and Fitch's proprietary sustainable home value model. Consistent with Fitch's RMBS rating methodology, Fitch assumed increasingly higher market-value-declines in the rating stress scenarios when estimating the borrower's equity position. In the 'AAAsf' rating scenario, Fitch assumes market value declines of 35% below a sustainable level.

Fitch also assumed in the rating-stress scenarios an increasingly higher-than-expected percentage of foreclosure loans would liquidate from REO in over six months. Fitch assumed 25% of initiated foreclosed loans in the base-case and 60% of initiated foreclosure loans in the 'AAAsf' scenario would both become REO and liquidate from REO in over six months.

To estimate the amount of the loss due to an extended REO liquidation, Fitch assumed the difference between the liquidation value and the FHA appraised value will be 5% in the base-case and increasingly higher in the rating stress scenarios. In the 'AAAsf' scenario, Fitch assumed the difference will be 30%. These discounts to the appraised values are notably less than typical quick-sale-adjustments applied to distressed sale valuations since the discount in this instance is applied to a full appraisal after the property has been acquired by the servicer, rather than an external appraisal or broker-price-opinion performed at the time of foreclosure initiation.

Fitch predicts the timing and likelihood of maturity events using actuarial tables. While slower-than-expected maturity events can put liquidity pressure on the trust's cashflow, faster-than-expected maturity events can increase the likelihood of uninsured losses since an increasing percentage of maturity events would occur prior to the loan being assigned to HUD due to reaching 98% of the maximum claim. To stress the timing and amount of uninsured losses, Fitch assumed faster-than-expected maturity events. In the 'AAAsf' scenario, Fitch assumed maturity events occurred five years faster than expected.

The uninsured jumbo reverse mortgage transactions reviewed are collateralized by mortgage pools consisting of one-to-four family, first lien, non-recourse reverse mortgage loans. A portion of the mortgage loans provide for periodic credit line draws by the borrower. Each transaction has a funding account comprised of cash and/or securities to fund these draws. No interest or principal is due on the loans until the occurrence of a maturity event triggered by the borrower moving, passing away, selling the home, or voluntarily prepaying the loan in full.

As maturity events occur and the reverse mortgage loans are repaid, funds are allocated to pay interest and principal on the notes. Since maturity events may not occur in a consistent pattern over time, the funding accounts are also required to maintain several months of interest reserves to cover potential interest shortfalls on the notes.

The four Re-REMIC classes reviewed are straight pass-throughs from the HECM transactions included in this review. Since they have no additional credit support, their ratings are mapped to the ratings of the underlying classes.

RATING SENSITIVITIES

Fitch analyzes each bond in the 'CCCsf' to 'AAAsf' scenarios to determine the likelihood of full principal recovery and interest. The scenario analysis incorporates Fitch's market value decline assumptions, probability of a loan of taking longer than six months to sell from REO, and probability of a HUD appraisal being lower than the liquidation price.

The analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'Bsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less-likely outcome. 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.

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 further 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.

Additional information is available at www.fitchratings.com.

US RMBS Reverse Mortgage Rating Actions for May 28, 2015

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866658

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Global Structured Finance Rating Criteria (pub. 31 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268

U.S. RMBS Cash Flow Analysis Criteria (pub. 06 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863973

U.S. RMBS Loan Loss Model Criteria (pub. 17 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=810788

U.S. RMBS Master Rating Criteria (pub. 01 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750719

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 24 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750110

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985498

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150528006606/en/

Fitch Ratings
Primary Analyst:
Ryan O'Loughlin, +1-212-908-0387
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson:
Grant Bailey, +1-212-908-0544
Managing Director
or
Sandro Scenga, +1-212-908-0278
Media Relations, New York
[email protected]

Source: Fitch Ratings

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