|Fitch: U.S. RMBS Improvements 'Encouraging,' but Challenges Persist|
Fitch Ratings, New York, said the improving U.S. housing market and stable macro environment are supporting legacy U.S. residential mortgage-backed securities performance of late, though the sector still has persistent challenges to overcome.
Fitch said signs of the turnaround in RMBS include improving new delinquency roll-rates and declining loss severities on liquidated loans, resulting in improved rating stability and positive rating momentum in 2013.
Fitch Managing Director Rui Pereira said the agency conducted rating reviews on every U.S. RMBS class in the past six months. Year to date, Fitch upgraded 480 RMBS bonds and currently has a "positive" outlook on 800 bonds.
“That said, rating improvement will remain limited in the near term,” Pereira said. “Pre-crisis RMBS transactions are still facing challenges. Additionally, it is important to note that while a welcome improvement, the recent upgrades encompass a small percentage of the total number of securities that Fitch monitors.”
In the long term, Pereira said many RMBS securities continue to face sizeable risks that will limit the number of upgrades this year. Among them are still-high delinquency pipelines, increased tail risk caused by adverse selection and a high percentage of borrowers that remain underwater on their mortgages. Additionally, RMBS transaction cash flows remain vulnerable to servicer actions including advancing policies and modification reporting.
“[We expect] future upgrade activity to be concentrated among classes with relatively short remaining lives within sequential payment priority transactions,” Periera said. “Additionally, classes with a positive outlook are disproportionately concentrated in ReREMICs issued since the start of 2010, seasoned manufactured housing transactions and subprime deals issued between 2003 and 2005.”
The report also noted “collateral improvement” in 2006-2007 RMBS deals; that said, Fitch said positive collateral trends will generally lead to improved principal recoveries on distressed classes rather than rating upgrades. The report said 94 percent of classes issued from 2006 to 2007 currently hold a rating below 'CCCsf', including 74 percent of classes that have already defaulted.
“More conservative rating stress assumptions than those applied prior to the financial crisis--particularly for investment-grade stress scenarios--will also stem the amount of rating upgrades,” the report said.