Fitch Reviews U.S. Scratch & Dent RMBS

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has taken various rating actions on 709 classes in 144 Scratch and Dent (S&D) RMBS transactions. The transactions reviewed are generally composed of residential mortgage loans that were originated with exceptions to the originator's underwriting guidelines or had experienced payment problems prior to issuance. The reviewed transactions were issued between 1996 and 2007.

Summary of the rating actions:

-- 587 classes affirmed;

-- 107 classes upgraded;

-- 15 classes downgraded.

In addition, Fitch affirmed two classes from one re-REMIC transaction issued in 2010 (RBSSP, series 2010-9).

A spreadsheet detailing Fitch's rating actions on the affected transactions can be found using the web link for 'U.S. Scratch and Dent RMBS Rating Actions for May 15, 2015'.

Key Rating Drivers:

Downgrades made up roughly 2% of all rating actions. Of the classes that were downgraded, only two held investment grade ratings prior to the review. The majority of downgraded classes were distressed ratings transitioning downwards as default becomes more likely. All downgrades were one rating category except for a single two-category downgrade of a non-investment grade class.

While almost 15% of all rating actions were upgrades, Fitch constrained possible further upgrades due to rating caps. The ratings of roughly 250 classes reviewed were constrained due to various rating caps, with the vast majority of these classes being affirmed or upgraded. Rating caps were driven by small loan counts, interest shortfalls, cashflow timing sensitivity, and projected months until bond payoff, and Ocwen servicing exposure. The ratings of classes for which the percentage of the pool serviced by Ocwen exceeded the bond credit enhancement were capped at 'Asf'.

Collateral performance continues to show improvements over the last five years, driven by strong home price growth, improving unemployment rates, and positive selection among remaining borrowers. Serious delinquencies and roll rates from current to delinquent for S&D and subprime borrowers have improved modestly since the last S&D sector review in August 2014.

Fitch's US RMBS Loan Loss Model was used to derive default and loss expectations. The model-derived loss severity assumptions for severely delinquent loans (90+ DQ, FC and REO) were increased in order to better reflect recently observed loss severity trends for seasoned subprime collateral. Despite the more conservative assumption for severely delinquent loans, aggregate expected losses were generally lower than those of the prior S&D sector review, creating positive rating pressure.

Rating Sensitivities:

When projecting default and loss severity, Fitch relies on its non-prime loan-level loss model. For transactions without loan-level data available, Fitch assumed default and loss severity assumptions consistent with subprime vintage averages as determined by the loss model, adjusted for pool-specific product composition and performance.

Fitch analyzes each bond in a number of different scenarios to determine the likelihood of full principal recovery and timely interest. The scenario analysis incorporates various combinations of the following stressed assumptions: mortgage loss, loss timing, interest rates, prepayments, servicer advancing, and loan modifications.

The 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 outcomes. 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.

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 nationally to decline further 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.

Additional information is available on www.fitchratings.com

Applicable Criteria and Related Research:

--'U.S. RMBS Surveillance and ReREMIC Criteria' (June 24, 2014);

--'Global Structured Finance Rating Criteria' (March 31, 2015);

--'U.S. RMBS Loan Loss Model Criteria' (Nov. 17, 2014);

--'U.S. RMBS Cash Flow Analysis Criteria' (April 6, 2015);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Dec. 19, 2014);

--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions' (May 28, 2014);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);

--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011).

Applicable Criteria and Related Research: U.S. Scratch and Dent RMBS Rating Actions for May 15, 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866182

Structured Finance Recovery Estimates for Distressed Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557

Counterparty Criteria for Structured Finance and Covered Bonds

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

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions

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

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695535

U.S. RMBS Cash Flow Analysis Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984761

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.

Fitch Ratings
Media Relations
Sandro Scenga, New York, +1-212-908-0278
[email protected]
or
Presenting Analyst
Ryan O'Loughlin, +1-212-908-0387
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Roelof Slump, +1-212-908-0705
Managing Director

Source: Fitch Ratings

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