Fitch Updates Ratings Model; Projects Steep Housing Price Declines
Fitch Ratings said Thursday that it had enhanced its U.S. residential mortgage loss model, called ResiLogic, a key component of the agency's overall approach to assessing U.S. RMBS new-issue ratings. While the new-issue market has been essentially dead for all of 2008, Fitch's revisions suggest that the agency is preparing for where the market might be headed next: seasoned mortgage issuance. They also suggest a very bearish take on housing prices over the next five years: Fitch said in its report that it is expecting home prices to decline by an average of 25 percent in real terms at the national level over the next five years, starting from the second quarter of 2008. And that's the base case scenario. Seasoned securitizations? In face of those sort of expectations for housing, more than a few market participants have suggested to HW as of late that in order for the battered securitization market to regain its footing, it may have to revert back to issuing deals only for mortgages that have already been "seasoned." Seasoning refers to the usual pattern of increasing defaults during the first 24 months of a deal's life; so-called "seasoned deals" typically exhibit much more stable and predictable default patterns. While the updates to ResiLogic cover other areas, it's Fitch's addition of the ability to analyze seasoned loans and to take into account loan payment history and house price changes since loan origination that are probably the most telling, at least in terms of where the securitization market is headed next. "The ability to look at seasoned loans through ResiLogic is significant because the dearth of new mortgage origination has placed emphasis on the securitization of seasoned loans," said Huxley Somerville, group managing director and head of Fitch's U.S. RMBS group. "To rate transactions with seasoned loans, it is imperative to understand how they are performing in the current environment." Fitch will also roll out new 25 MSA-level risk factors influencing frequency of foreclosure and loss severity estimates, the agency said; the 25 MSAs chosen are those that have exhibited strong non-conforming mortgage lending activity in the past. "Some MSAs such as San Diego and San Francisco, CA are expected to experience home price declines by as much as 47 percent and 33 percent over the next five years, while home prices in MSAs such as San Antonio, TX are expected to appreciate by 7 percent," Somerville said. "The home price forecasts are embedded in the state and MSA level risk indicators and will be updated quarterly." For many investors, the updates come too late to salvage existing deals; but it's clear that the agency has become much more bearish on prospects in the primary housing market. For more information, visit http://www.fitchratings.com.