Nonprime Ratings Actions

Fitch Ratings announced Monday several criteria revisions to its mortgage default and loss model for residential mortgage-backed securities.

The revised ResiLogic model raises the level of expected defaults in a number categories.

For instance, regional economic risk will be factored in — increasing expected default rates by an average of 20 percent, according to the announcement.

“Fitch believes that the greatest risk to new U.S. RMBS is the continued deterioration of home prices,” the statement said.

Short-term and hybrid adjustable-rate mortgages will also increase estimated risk, with a 30 percent higher expected default rate for ARMs that adjust in less than 24 months and a 22 increase for 2/28 ARMs.

“Fitch anticipates that refinancing options for existing 2-year hybrid ARM borrowers will be sharply curtailed,” the ratings agency explained. “The absence of a comparable product is likely to expose more borrowers to payment shock risk and increase defaults at the rate reset.”

Expected default rates for low documentation loans will be 43 percent worse than for full documentation loans, the statement indicated.

Fitch noted subprime loans lacking data about debt ratios will be assumed to have a 50 percent debt-to-income ratio. The agency said it is concerned with the prevalence of missing debt ratios.

Also, due to recent poor performance, loans with short-term seasoning at the time of securitization will no longer be looked at more favorably than unseasoned loans.

Accredited Home Lenders Inc., which last week raised questions about its ongoing viability, saw its RPS3- subprime servicer rating placed on Rating Watch Negative by Fitch yesterday. The action reflects continued liquidity challenges in the difficult subprime market.

More than $1.5 billion in Ameriquest Mortgage Securities Inc. transactions were downgraded by Fitch on Monday. The bonds were originally placed under analysis on July 12 following an analysis of the June 2007 remittance data. The downgrades reflect changes to Fitch’s subprime loss forecasting assumptions.

Servicers are rated on a scale of one to five, with one being the highest rating, Fitch said. Ratings are further differentiated by a plus or minus sign.

Standard & Poor’s Ratings Services announced today it placed 207 classes of vintage 2005 and 2006 Alt-A RMBS on CreditWatch with negative implications. The actions affect nearly $1 billion in securitizations, or about 0.2 percent of the $455 billion in Alt-A transactions rated by S&P.

“These actions reflect a rising level of delinquencies among the Alt-A collateral supporting these transactions, as well as our expectation that losses on the collateral will exceed historical precedent and may exceed our original expectations,” the statement said. “The collateral underlying the Alt-A transactions has been experiencing high levels of severe delinquencies (90-plus days, foreclosures, REOs) that have not abated.”

The agency explained Alt-A recovery rates are worse than for subprime loans because of higher loan-to-values and higher foreclosure expenses. It is adjusting the level of expected risk on purchase money loans with high combined LTVs and reducing its reliance on higher FICO credit scores when significant risk layering is present.

“The increase in recent delinquencies across all FICO bands indicates that a borrower’s previous credit performance is less predictive of stronger performance for loans with increased risk layering,” S&P stated.

Today’s actions by S&P are in addition to 30 classes from 27 transactions placed on CreditWatch beginning in March and are expected to be resolved within the next several weeks, the press release said.

“We are also conducting a review of CDO transaction ratings in which the underlying portfolios contain any of the securities affected by these rating actions,” S&P reported — though a subsequent announcement stated the actions are not expected to have a significant impact on its global CDO transaction ratings.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: mtgsam@aol.com