Fitch Ratings announced proposals that would see significant increases in its loss severity assumptions for foreclosed residential property securing defaulted mortgage loans in German RMBS and German mortgage covered bonds.

The proposals impact market value decline (MVD) assumptions that factor into the agency's loss severity calculations and follow an agency review of historical data which indicates much higher loss severities in forced sale situations in the German market than previously assumed.

MVD assumptions are adjustment factors used to account for a decline in the value of property backing residential mortgage loans in a stressed economic environment when disposed of through a forced sale. They also determine the extent of loss severity and recovery assumptions in the rating agency's analysis of German RMBS transactions.

The  agency has published an exposure draft of its methodology revisions. The main change is that MVDs are based exclusively on historical foreclosure data available. Fitch believes that this data is the best predictor for deriving the expected decline in the property's  value in a forced-sale scenario. In addition, the determination of regional specific MVDs is now based on differences in purchasing power, rather than geographical regions, such as federal states. 

"With an average reduction of 46% in a forced sale compared to a property's open market value, the observed liquidation proceeds have proven to be lower than in other western European countries for which foreclosure data has been available," said Susanne Matern, senior director and head of the structured finance team in Frankfurt. "This difference may reflect the specifics of the German housing market, especially its comparatively high degree of illiquidity and existing regional discrepancies between rural and metropolitan areas, as well as weak and strong economic regions."

The exposure draft period will also allow RMBS and covered bond issuing institutions further time to provide supplementary data to the agency which may factor into its final revised criteria assumptions.

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