Fitch Takes Hatchet to Alt-A, Prime RMBS Ratings

There are simply almost too many securities affected by recent ratings cuts at Fitch Ratings to list, as the number of deals affected by deteriorating collateral performance — particularly among Alt-A and prime jumbo securitizations — are seeing ratings tumble at a record pace to start August. On Monday alone, Fitch downgraded or put on negative watch 2,655 classes from 190 different deals, both prime and Alt-A, and all from 2005 to 2007 vintages. And that was after downgrading or putting on watch 4,441 classes from 256 separate deals on Friday — last week’s cuts included a large chunk of pre-2005 prime and Alt-A securitizations, as well. That means between Friday and Monday, Fitch took out the carving knife — no, make that a machete — to 7,061 securities from 446 deals. And nary a subprime loan in the bunch. Given the volume of downgrades, Fitch did not provide a detailed breakdown by deal; but an analysis by HousingWire of Monday’s downgrades found that 229 of the ratings cuts affected tranches now formerly rated AAA by the agency, or just under 10 percent of affected classes. While most of the cuts were to the AA level, some AAA tranches saw their ratings plunge to BB or lower — nearly all of these “deep cuts” were associated with Citigroup securitizations of Alt-A mortgages from 2006 and 2007. Fitch had warned on quickly deteriorating performance in prime RMBS in a research note published on July 29, in which a team of analysts found that loss drivers in prime jumbos are similar to those driving losses in other classes of loans: to be specific, layered risk. “Prime jumbo borrowers with a simultaneous second lien underwritten to a limited documentation or stated income program (low-doc program) represented 17% of Fitch-rated 2007 prime issuance, more than double the percentage from 2005,” the analysts noted. While prime jumbo borrowers didn’t pursue 100 percent financing as often through the use of a second lien, Fitch said that rapid home price deterioration in California and Florida — half the volume of all jumbo prime loans — had wiped out any equity homeowners buying in 2006 and 2007 once had. But the really troubling admission was something that we’ve been discussing here at HW for some time: that while the loss percentages in Alt-A and prime jumbos don’t compare to subprime, they don’t have to in order to hurt investors just as badly. “While the level of delinquency in prime jumbo pools remains a fraction of the levels exhibited in subprime pools, the comparably lower levels of credit protection make prime transactions sensitive to the recent performance deterioration,” the Fitch analysts noted. All of which means that as things get worse, investors should get used to Fitch issuing a spreadsheet to cover the hundreds of downgrades it was forced to make. In a single day. For more information, visit http://www.fitchratings.com. Related links: Fitch report on prime RMBS