Fitch Ratings said that the securitization industry supports its plan to implement a more forward-looking, and countercyclical RMBS modeling framework. The model is based on projected home price movements where credit enhancement rises as risk enters the system and dips when the risk is neutralizing.
The rating agency closed the comment period on its proposed new U.S. RMBS rating criteria and said that the feedback from numerous RMBS investors, regulatory agencies and research firms was widely positive and constructive. The different market participants shared Fitch's perspective on its new approach to modeling credit risk in new-issue RMBS transactions.
Numerous market players, according to Fitch, believe that the rating stresses being applied by Fitch for high investment-grade levels ('AAA', 'AA' and 'A') were potentially too conservative. This was most notable for regional housing markets that are at or near-equilibrium home prices.
Several commentators also requested added clarity on key model inputs. This includes the sustainable market value decline (SMVD) variables taken from the sustainable home price model and the regional economic risk factor offered by University Financial Associates. Commentators also stressed the significance of more granular SMVD assumptions beyond the state level.
A number of commentators indicated that they had expected the ‘debt-to-income’ variable to have a greater influence on default rates. There was recognition, however, that the volume and quality of data available to support this conclusion was limited.
Fitch said that market participants generally agreed with the ‘risk premium’ variable conceptually. However, they questioned its practical application given the current mortgage funding dynamics and liquidity challenges. Others also argued that its predictive power is being captured by other variables in the model, including FICO.
Some parties also suggested incorporating other variables in the model including adjustments for loan seasoning, considerations for self-employed borrowers, and distinctions by loan origination channel.
Fitch said it plans to incorporate final changes to the model, with the goal of publishing final criteria within the next 60 days and will apply the criteria to pools of newly originated, prime mortgage collateral along with its rated prime RMBS transactions.
