Fitch Revises Loss Expectations For Vintage Subprime RMBS

t of its ongoing review of subprime residential mortgage-backed securities (RMBS), Fitch Ratings has taken various rating actions on 543 2005-through-2008 vintage U.S. subprime RMBS transactions. The actions reflect Fitch's analysis of expected default and loss from the collateral pool in addition to cashflow analysis of each class. The average updated expected collateral losses as a percentage of the original pool balance for the 2005, 2006 and 2007 vintages are 17%, 39% and 47%, respectively. As a percentage of the remaining pool balances, the average expected losses for the three vintages are 45%, 59% and 55%, respectively. The updated expected collateral losses incorporate performance trends since the last rating revisions, which relied on September 2008 remittance data. The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch's revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today's levels. The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages, Fitch adds. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California, where the unemployment rate has jumped from 7.8% to 11%. The combination of continued home price and employment decline has kept negative pressure on the roll rates of performing borrowers into a delinquency status. Although net roll rates have moderated from the seasonal high in January, the most recent month's performing-to-delinquent net roll rate of 3.17% remained modestly higher than that exhibited in the third quarter of 2008 when modified loans are excluded. Modifications have increased notably, and Fitch estimates 23% of the 2005-2007 vintage borrowers reported as current have had their loan terms modified. In recent months, on average, approximately 2% to 3% of the outstanding mortgage pool has been modified each month. Fitch adds that the performance to date of modified loans continues to raise concerns about the sustainability of the modifications, due possibly to an insufficient emphasis on the borrower's overall financial debt burden and the borrower's willingness to stay with the property due to their current equity position. In a [link=][u]May report[/u][/link], Fitch said redefault rates on modified loans are trending above 50% within 12 months of the modification, and redefault rates after 12 months of 65% to 75% appear likely. The market and performance trends reflected in the updated loss projections have resulted in further rating downgrades for the remaining classes outstanding in the 2005-2008 vintages. Of the approximately $475 billion senior classes initially rated AAA and issued between 2005 and 2008, $293 billion has been repaid to date. Of the remaining outstanding senior class balance of $182 billion, approximately 18% ($32 billion) remains AAA upon completion of this rating review due to structural features that have mitigated the collateral underperformance. An additional 12% remains investment grade, while 9% is non-investment grade but not distressed; 61% is in a distressed rating category below B due to an experienced or expected impairment. SOURCE: Fitch R


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