Fitch Acts On Second-Lien, HELOC RMBS Transactions

Fitch Ratings has taken various rating actions on 62 U.S. subprime, fixed-rate second-lien and 13 variable-rate home equity line of credit (HELOC) residential mortgage-backed securities transactions.

Home-price declines have caused most second-lien and HELOC borrowers to fall into negative equity, Fitch says, preventing sustained improvement in monthly roll rates. The monthly rate of new delinquency remains elevated at approximately the same level as one year ago and rose in the month of September.

For second lien and HELOC pools, Fitch uses historical roll-rate behavior to project future defaults. Fitch assumes 100% loss severity on defaulted loans.

For subprime, fixed-rate, closed-end second-lien transactions, Fitch's average projected mortgage pool loss assumptions as a percentage of the initial pool balance are 2% for vintages prior to 2005, 25% for the 2005 vintage, 57% for the 2006 vintage and 65% for the 2007 vintage. On variable-rate HELOC transactions, Fitch's average projected pool loss assumptions as a percentage of the initial pool balance are 2% for vintages prior to 2005, 12% for the 2005 vintage and 15% for the 2006 vintage.

The weaker performance of the closed-end second-lien transactions relative to the HELOC transactions can be explained by the credit profile of the borrowers, Fitch says. The closed-end second mortgage pools reviewed generally had initial weighted average credit scores between 640 and 700, while the HELOC mortgage pools generally had weighted average credit scores above 700.

Additionally, the initial weighted average combined loan-to-value ratio (LTV) of the closed-end second-mortgage pools reviewed was generally close to 100%, while the HELOC mortgage pools reviewed generally had weighted average combined LTVs of approximately 85%.

Prior to the start of national home-price declines in the middle of 2006, closed-end, second-lien transactions benefited from rapid voluntary prepayments, which helped to protect senior classes of transactions issued prior to 2006 through principal distribution and credit enhancement deleveraging.

Of the 100 Fitch-rated senior classes issued prior to 2006, 67 have paid in full, and only three are expected to default. In comparison, of the 61 Fitch-rated senior classes issued in 2006 and 2007, only 12 have paid in full, and 41 have defaulted or are expected to default in the future. Only one HELOC senior class is expected to default.

(A spreadsheet detailing Fitch's rating actions on the transactions reviewed can be found on the agency's Web site by performing a title search for "Second Lien Rating Actions for November 2, 2009.")

SOURCE: Fitch Ratings


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