Fitch Reports Vast Majority of Re-REMICs Retain Rating, Get Paid in Full

Of the more than 1,800 re-REMIC classes rated triple-A by Fitch Ratings since the beginning of 2008, more than 95% retains the original rating or were paid in full (PIF), and 98% retain investment-grade status or were PIF. Fitch since downgraded to below single-B status only 20 triple-A ratings issued in 2008. These downgrades related to transactions backed by Alt-A or prime collateral whose performance deteriorated in the wake of the Lehman Brothers bankruptcy and the substantial increase in unemployment in late 2008. Of the re-REMIC classes rated triple-A since the beginning of 2009, 99% retain their ratings or were PIF, and 100% remain investment-grade. Fitch increased the average loss protection on triple-A-rated prime re-REMICs to about 28% from 8% in early 2008. Alt-A loss protection grew to more than 40% in Q309, when Fitch ceased rating re-REMICs backed by Alt-A collateral, from roughly 11% in early 2008. “Though Fitch’s re-REMIC rating stability has improved significantly, certain of these ratings, particularly those issued prior to the various limitations put in place by Fitch, still remain vulnerable to downgrade risk,” Fitch said in a statement. “However, Fitch believes the number and magnitude of those rating actions will be muted by the steps taken to identify and discontinue issuing ratings on many re-REMIC product types.” Fitch made a number of limitations in the past year regarding certain resecuritization transactions it will rate. Today, the credit-rating agency detailed several vintages of resecuritizations that paint a vivid picture of the product’s performance. Resecuritizations of US residential mortgage-backed securities (RMBS) transactions, or re-REMICs, where underlying securities are issued by real estate mortgage investment conduits, trace their origins to the mid-1990s. Re-REMICs have more recently been used as a means of creating positive cash flows out of existing securities. Since the onset of the current mortgage crisis, however, Fitch has significantly hiked the amount of loss protection necessary to achieve a triple-A rating. The credit-rating agency also limited the types of re-REMICs it will rate “because the risks inherent in the collateral or structure were deemed inconsistent with high investment grade ratings.” Other credit-rating agencies are catching up with deteriorating performance of collateral underlying certain re-REMICs, including Standard & Poor’s recent downgrade of several triple-A tranches. Fitch, for its part, reduced the kinds of re-REMICs it will even consider for rating. The agency does not issue new ratings on re-REMICs backed by subprime or Alt-A collateral, or by the subordinate classes of RMBS securities. Additionally, Fitch does not consider assigning triple-A ratings to re-REMICs backed by pools with less than 300 current-pay loans, or in cases where the current combined loan-to-value ratio of the pool is greater than 100% due to further house price declines and greater negative equity. The changes eliminate more than 90% of the re-REMIC transactions presented for Fitch for rating. Write to Diana Golobay.

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