Fitch Ratings issued unsolicited market commentary on American Home Mortgage's servicing advance deal that is currently in the market called AH Mortgage Servicer Advance Revolving Trust 2001-1 (AHM SART 2011-1).
According to Fitch, based on a review of preliminary data related to the offering, it found that advance rates on the receivables were deemed too high to achieve a ‘AAA’ rating under Fitch’s criteria.
Furthermore, the rating agency said that 'AAA' notes are expected to have enough liquidity or a sufficient reserve fund to meet a minimum of 13 months of debt service and fees. However, American Home's deal offers a reserve fund that only has nine months of collections, which does not comply with Fitch’s threshold for a deal to get a ‘AAA’ rating. The offering's credit enhancement is more in line with mid-investment grade ratings, according to Fitch.
The transaction comprises term notes and variable funding notes. It is backed by a revolving pool of receivables representing the right to be reimbursed for advances made by the servicer with respect to mortgage loans that were serviced pursuant to the related servicing agreements, according to a DBRS presale report.
These advances include the following: scheduled principal and interest payments, tax and insurance premiums as well as costs and expenses associated with foreclosing on and liquidating mortgage collateral.
As mentioned earlier, a reserve account with nine months of interest and fee coverage is in place. Additionally, the deal benefits from a structural mechanism that limits advance rates if its performance deteriorates.
Fitch updated its servicer advance receivables criteria in December 2010 to better capture the extended property liquidation timelines that are now predominant in the mortgage industry. The amended methodology causes the rating agency to have a more conservative credit view on servicer advance receivable offerings.
The weak housing market and recent macroeconomic stresses have also resulted in a sharp mortgage delinquency and foreclosure increase, along with considerably extended property liquidation timelines.
Foreclosure and liquidation timelines, Fitch added, have also been affected by moratoriums and changes in servicing practices that were brought on by heightened regulatory scrutiny on industry practices.
These factors will continue to influence residential mortgage foreclosure and liquidation timelines in the near-term and are considered in Fitch’s base case and stress scenarios. High investment grade notes should be able to withstand extreme scenarios characterized by discounted collections and extended repayment vectors. Furthermore, Fitch said that cash flow realization has a high linkage to servicing continuity.
According to Fitch, even while it was asked to offer feedback on this deal, it was ultimately not asked to rate the transaction because of the rating agency's more conservative credit view. The issuer's reasoning behind terminating the rating process with Fitch is described in the deal's preliminary private placement memorandum.
For more preliminary information on the American Home transaction, please see the link below from the ASR Scorecards database.