NEW YORK–(BUSINESS WIRE)–Link to Fitch Ratings’ Report: U.S. RMBS Non-Performing Loan Criteria
Fitch Ratings has finalized its approach for rating residential
mortgage-backed securities (RMBS) backed by non-performing loans (NPLs).
The proposed criteria are detailed in its criteria report published
today. Fitch defines NPLs as loans that are 60 days or more delinquent
(DQ) and considers a transaction as an NPL RMBS if more than 10% of the
collateral comprises 60+ days DQ at issuance.
Fitch’s approach to analyzing NPL RMBS leverages its U.S. RMBS Seasoned
and Re-performing Loan Criteria with respect to loan file documentation,
due diligence review scope and sample size, and representations and
warranties. However, due to the idiosyncratic and adverse-selection
risk, Fitch applies a rating cap of ‘Asf’ to NPL RMBS and expects a
number of structural features, such as a sequential pay structure and
application of available funds to pay interest to the rated notes.
Fitch assumes a 100% probability of default for NPL loans and loss
severity is determined based on the loan’s current property value,
Fitch’s model-projected sustainable market value decline, property
liquidation assumptions, and a distressed sale discount.
A key distinction between Fitch’s NPL rating approach and that used for
re-performing loans is its cash flow analysis. For NPLs, Fitch applies a
transition rate approach where the transition rates from one DQ status
to another are decreased for a period of time to delay liquidation
timing for stress scenario analysis.
Additional information is available at ‘www.fitchratings.com‘.
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