Fitch released what amounts to nearly a book's worth of a press release today, covering a slew of new RMBS downgrades and detailing new ratings criteria. Citing what it called "very high levels of delinquency and default," the agency said affirmations affected 232 classes with an outstanding balance of $20 billion; downgrades hit 150 classes with an outstanding balance of $2.4 billion. One of the most interesting new additions to Fitch's ratings criteria was its assessment of 2/28 subprime loans:
Given the poor performance to-date of recently originated mortgage pools, the weakening home price environment and the growing evidence of poor mortgage underwriting coupled with borrower/broker fraud, Fitch believes that ARM resets will engender higher default rates than those assumed in the initial rating forecast and higher than the rates currently being experienced. The withdrawal by lenders of many mortgage refinancing options further exacerbates this risk. Therefore Fitch is applying two additional multipliers to 2/28 ARMs ... The combined effect of all the adjustments described above resulted in an average expected default assumption of 32% and an average loss severity assumption of 44% for the RMBS acted on today. The expected remaining loss on these transactions, expressed as a percentage of the outstanding pool balance, ranges from 10% to 24% and averages 14%. The lifetime cumulative expected loss of the original pool balance ranges from 9% to 16.5% and averages 11.4%.
The fact that Fitch is willing to use the assumption that lenders will only recover an average of just 56 percent on the foreclosures they initiate is far more telling than any commentary I could write.