Fitch Updates US RMBS Model, Warns on More Downgrades

On the heels of rival Standard and Poor’s move to adjust its ratings assumptions, which lead to a massive downgrading of RMBS and related securities late yesterday, Fitch Ratings said Thursday that it had enhanced its U.S. RMBS default and loss model, known as ResiLogic. The new model will incorporate 25 new multipliers for specific metropolitan statistical areas (MSAs), the rating agency said, although Fitch did not specify which 25 MSAs it would track via the new multipliers. In the past, Fitch’s RMBS modeling employed only state-level risk multipliers, so the new MSA multipliers will certainly enable a stronger regional focus on rating RMBS transactions. There are other changes, as well: apparently, even Fitch’s state-level risk multipliers didn’t influence loss severity estimates in the past, instead only factoring into an assessment of frequency of foreclosure. The multipliers will modify both loss severity and frequency of foreclosure estimates going forward. Fitch also introduced a new variable to capture macro risk trends in default and loss expectations, which will be updated quarterly. Fitch said that “the combined impact of these revisions generally produces a higher expected loss for subprime and Alt-A mortgages, and to a lesser extent, for prime mortgages.” No kidding. Some of the ratings moves appear as if they could result in some dramatic shifts. From the press statement:

For example, a hypothetical newly originated pool of subprime mortgages having the same characteristics as those backing the ABX.HE 07-1 index, would have an indicated ‘AAA’ loss expectation of 43%, meaning that to be rated ‘AAA’ a bond would have to be able to withstand 43% losses on the mortgage pool. For comparison, the ‘AAA’ level as of the August 2007 revision of ResiLogic was 31%.

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