Fitch Warns on Prime RMBS, Cites Negative Equity

On the heels of the Treasury’s latest plan to work with private investors to purchase private-party RMBS, Fitch Ratings said Monday afternoon that it had revised its projected cumulative loss estimates for 2005-2007 vintage U.S. prime RMBS transactions — in other words, more downgrades are coming. It’s probably more accurate to say that Fitch amplified its loss estimates, moving cumulative loss estimates for 2007 vintage prime RMBS approximately five times higher than previously estimated. “Delinquencies have increased dramatically in prime RMBS transactions as borrowers grapple with the ongoing pressures of declining home values, rising unemployment and lack of refinancing alternatives,” said to group managing director and U.S. RMBS group head Huxley Somerville. “From a ratings perspective, the combination of declining credit enhancement and higher expected losses will result in increased ratings pressure for recent vintage prime RMBS.” As part of an ongoing monitoring of RMBS transactions, Fitch has been conducting rating reviews of prime pools over the last several weeks. The extent and rate of the portfolio deterioration associated with many of these transactions has resulted in downgrades for a significant number of subordinate and mezzanine bonds, the rating agency said. Additionally, for the 2005-2007 vintages, the deterioration in the relationship between credit protection and the revised expected loss will cause a sizable portion of the senior classes to be downgraded and/or placed on Rating Watch Negative, as well, Fitch warned. Why defaults are surging among prime borrowers has less to do with the mortgage instrument, as was the case early in the mortgage crisis, than with more traditional risk factors tied to declining property values and rising unemployment. For example, Fitch said it found that loans with multiple risk attributes such as limited income documentation and second-liens, are defaulting at rates approximately three times that of loans without those characteristics. Negative equity, too, is a still-emerging problem: borrowers with negative equity in some recent vintage mortgage pools are approaching 50 percent, the rating agency said. Borrowers with no remaining equity are defaulting at a rate three times greater than their equity-holding counterparts. Write to Paul Jackson at [email protected].