Fitch Ratings finalized how it will determine predicted losses a residential mortgage-backed security may experience. The ratings agency said Monday at the core of the changes will be how analysts determine the effect of declining borrower equity and falling home prices on the losses seen on the mortgage. Fitch also said the changes will help it blend loan-level characteristics with larger economic factors when projecting how an RMBS offering would perform. “In short, credit protection will increase materially during housing booms accompanied by ‘unsustainable home prices,'” Fitch said. “Conversely, credit protection will decrease as ‘bubbles deflate’ and risk in the housing market neutralizes.” Fitch initially introduced the new method in February and provided a few tweaks since. It has established a two-step stress test to gauge losses on a RMBS issue when home prices are first reduced to sustainable values and then subjected again to further declines. The ratings agency combined the sustainable market value with the original loan-to-value ratio of the loan to form what it calls an sLTV, “the most predictive variable of borrower default,” Fitch said. Fitch will apply the enhances modeling to both new and existing RMBS deals. Write to Jon Prior. Follow him on Twitter @JonAPrior

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