Fitch Ratings has taken various rating actions on 720 pre-2005 vintage U.S. subprime residential mortgage-backed security (RMBS) transactions in the course of its ongoing review of subprime RMBS.
The rating actions reflect Fitch's analysis of expected default and loss from the collateral pools in addition to cashflow analysis of each class. The average updated expected collateral losses as a percentage of the original pool balance is 6%. As a percentage of the remaining pool balances, the average expected losses are 29%.
The average expected mortgage pool loss did not vary greatly from the prior review in July 2009. However, a number of individual transactions experienced deterioration, which Fitch says resulted in rating downgrades. Additionally, the rating review incorporated recently revised interest-rate stress criteria that generally resulted in a more conservative valuation of the future excess spread available for credit support.
The projected excess spread for pre-2005 subprime transactions is particularly sensitive to interest-rate assumptions given the number of floating-rate bonds collateralized primarily with fixed-rate mortgage loans, the agency notes. The percentage of fixed-rate mortgage loans remaining in pre-2005 pools has roughly doubled from 30% at issuance to 60% today due to the higher prepayment and default rates of adjustable-rate mortgage loans.
The projected excess spread valuation also assumes that servicers will not advance on loans in foreclosure or real estate owned status. Fitch estimates that servicer advancing in the subprime sector has dropped from approximately 80% of all delinquent loans one year ago to approximately 70% in the most recent month.
The projected mortgage losses reflect a home-price assumption of approximately another 10% decline in national home prices from the first quarter of the year, reflecting a total peak-to-trough assumption of approximately 36%. Home prices have generally improved since the last rating review due to a constraint on the liquidation of distressed properties. Nonetheless, Fitch believes home prices will ultimately be negatively affected by an increase in distressed-property liquidations as servicers identify a greater number of borrowers unwilling or unable to have their loans successfully modified.
Despite an assumption of further home-price declines, Fitch has modestly reduced the expected defaults from subprime borrowers who are current on their mortgage, reflecting some positive selection within the remaining performing borrowers. While the total percentage of borrowers over 60 days delinquent was higher in April (26%) than it was a year ago (23%), in recent months, roll rates from performing to delinquency have improved notably.
Of the approximately $603 billion senior classes initially rated AAA and issued prior to 2005, $589 billion (97%) has been repaid to date. Of the remaining outstanding senior class balance of $14 billion, approximately 65% ($9 billion) remains AAA upon completion of this rating review due to structural features that have mitigated any collateral underperformance, Fitch says. An additional 29% remains investment grade, while 5% is non-investment grade but not distressed. Less than 2% is in a distressed rating category below 'B' due to an experienced or expected impairment.
SOURCE: Fitch Ratings