Fitch Ratings said late Friday that it had placed $139 billion of subprime RMBS on Watch Negative, the result of increased loss expecations. The rating agency said it now expected cumulative losses for the 2006 and early 2007 subprime vintages to range from 21 to 26 percent. That loss estimate is by far the largest of the three rating agencies. Both Standard & Poor's and Moody's Investors Service have in recent weeks updated their loss expectations; S&P said it expected cumulative losses on the 2006 vintage to approach 19 percent, while Moody's estimated total losses at 14 to 18 percent. Fitch's move affects 2,972 rated classes, it said, and comes as the rating agency has enhanced its default and loss model (see HW's earlier story). A review is expected to be complete by the end of February. It's worth noting some of the language in Fitch's press statement -- because it's the first time any of the rating agencies have lended credence to the idea that borrowers are walking away from their homes [emphasis added]:
In Fitch's opinion the contraction in the mortgage markets has contributed to an acceleration and deepening of home price declines, and has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Additionally, the apparent willingness of borrowers to 'walk away' from mortgage debt has contributed to extraordinarily high levels of early default, which is particularly noticeable in the 2007 vintage mortgages. As Fitch has described in recent research reports, this behavior appears to be largely attributable to the use of high risk mortgage products such as 'piggy-back' second liens and stated-income documentation programs, which in many instances were poorly underwritten and susceptible to borrower/broker fraud.
Not surprisingly, Fitch said it expected the classes under review would be subject to "widespread and significant downgrades" affecting all levels of capital structure. For more information, visit