Fitch Ratings said today that the recognition of the need for greater transparency of structured finance transactions is a positive direction for the industry.
The rating agency added that the improvement of the quality of information provided by originators is a significant factor in both the revival of the structured finance industry and the re-entry of investors into the market. The statement followed calls by Francesco Papadia, director general at the European Central Bank (ECB), for greater transparency regarding the transactions accepted as collateral, and suggestions that reporting could instead include more granular and even possibly loan-by-loan information.
"Obtaining meaningful granular, loan-by-loan data on an ongoing basis post-closing from originators can often be a challenge, especially for RMBS," says Stuart Jennings, Fitch structured finance risk officer for EMEA and APAC. "Getting such information is important for performance assessment on an ongoing basis - for example, in determining whether particular segments of a portfolio are contributing more to performance issues."
Typically, portfolio level data is the key to portfolio analysis, given the complexities that arise from the compilation of thousands of data points associated with granular information. However, loan-level data is thought by Fitch analysts to play a growing role in isolating and understanding performance issues as transactions face more difficulties.
There are claims that confidentiality issues may come into play, which Jennings denies citing that loan-by-loan analysis is already available when necessary for surveillance reviews or performance assessments, as well as by originators at the time of closing. "There may be objections based on resource constraints to the provision of such information on a more regular basis, said Jennings. However, such regular granular information is going to be increasingly needed, as performance deteriorates, to help isolate and understand where pressure points are arising and help formulate robust expectations for future performance."
Currently, Fitch analysts are making conservative assumptions about a portfolios performance when there is insufficient information, which can lead to a more adverse rating than if more granular data were utilized. In extreme cases, the agency may ultimately withdraw ratings if the performance information presented is insufficient to explain how portfolio performance is unfolding.