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Fitch Details New Criteria for Newly-Issued US RMBS

Fitch today released some high-level details of its updated ratings criteria for newly-issued RMBS deals, incorporating new assumptions for falling home prices, poor performance of loans with certain characteristics and substantial changes in mortgage originations. Some highlights:

  • Use of regional economic modeling
  • Increased default expectations for hybrid ARMs, option ARMs
  • Introduction of “low doc” loan categorization (past categories included full, reduced, none)
  • Use of back-end debt ratios, rather than front-end debt ratios, when calculating default expectations

I’m sure the above are an improvement, but it’s a revelation that prior RMBS modeling at Fitch didn’t account for variable regional impact. Didn’t discriminate on documentation at a level that reflected market realities. Didn’t adjust default multipliers enough to cover higer-risk loans. Didn’t apply what would appear to be the most common-sense debt ratio as a baseline for default probabilities. If I were an investor, I’d be wondering about the real rating of any MBS I was holding — that AA security wouldn’t be looking very good to me, especially if it was comprised of loans from California. Or Michigan. Or Florida. Or Ohio. Or if the majority of pooled buyers were leveraged to the hilt on the back-end. Or if the loans were categorized as “reduced” when they should have been categorized at “low doc.” I think you get the idea.

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Don’t miss the “Making Stats a Reality” panel at the Women of Influence Forum Oct. 3 HW+

“Nothing is more timely (in my opinion) than having an open, honest and frank conversation about supporting women who want to make a difference in a historically male-driven industry by bringing on industry-leading women to the leadership table,” said Hillary Saunders, chief broker officer and co-founder of Side, on this upcoming panel at HousingWire Annual.

3d rendering of a row of luxury townhouses along a street

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