Scratch-and-Dent Loans Holding Up

During the first three quarters of 2005, Fitch Ratings analyzed 36 securitizations completed by 15 different issuers totaling $6.7 billion and reflecting a 436% aggregate level increase from two years ago, according to an announcement Tuesday.

The majority of the scratch-and-dent pools Fitch analyzes are composed of either loans with origination-related exceptions or performance-related issues, such as performing, reperforming, subperforming, and nonperforming collateral, but pools of late have contained remnants of both types of concerns. The various combinations of collateral that any one scratch-and-dent pool can contain make it difficult to compare securitizations to one another, and therefore it is important to analyze each transaction individually, Fitch noted.

According to Fitch’s Scratch & Dent: This Is Not Your Father’s MBS report, “transactions with guideline exceptions have often performed slightly better than expectations, while those with performance issues have performed slightly worse.” Meanwhile, securitizations that are structured with growing overcollateralization targets are usually able to build to their targets within the first year and a half.

Nonetheless, scratch-and-dent transactions “have generally performed at expectations, due in part to RMBS servicers’ workout and liquidation procedures as they directly affect loan recoveries,” Fitch Managing Director Vincent Barberio said in the statement. “Subprime and special servicers are generally best-suited to service pools of distressed loans because they typically deal with a greater number of poorly performing loans and have adequate tools in place to handle them.”