Fitch Ratings is seeking feedback from market participants in respect to its revised criteria for rating transactions of Dutch mortgages backed by the Nationale Hypotheek Guarantie (NHG), a state-sponsored guarantee that compensates lenders and issuers for potential losses on guaranteed mortgages.
Fitch's proposed criteria changes relate to the agency's analysis of both the operational and the amortization risks. One of Fitch's proposals is to no longer assume any repurchase of WEW-rejected loans by the seller at rating levels above the seller's rating.
The agency also proposes to apply a rating-dependent adjustment to its pay-out assumptions, to incorporate the risk of a possible tightening of WEW's pay-out policy in a distressed economic context.
Under the NHG the guarantee administrator may not indemnify mortgage losses if, upon submission of the claim, it deems that affected loans are not compliant with the guarantee's terms. This creates operational risk. In addition, the guarantee coverage of each loan amortizes, while most Dutch mortgages do not, which creates amortization risk.
"Market trends in recent years have led Fitch to reconsider certain aspects of its criteria for Dutch NHG-backed mortgage loans," said Nicolas Ardoint, director in the agency's European structured finance team. "The demise of the financial markets in 2008 underlined concerns as to whether the capital invested in the loans' repayment vehicles efficiently compensates for the amortization of the guarantee coverage. WEW pay-outs also seem to have decreased in recent years, perhaps as a reflection of policy tightening."
Fitch said it would also amend its analysis of the amortization risk by assuming that defaults will occur later than previously assumed in a loan's lifetime, and after the guarantee coverage is largely amortized. As a result, the agency's loss expectations would depend significantly on the capital accumulated in the repayment vehicles attached to the loans.
Fitch requested that feedback be provided on its proposal by April 23, 2010.