Fitch Ratings is further developing its criteria for evaluating the performance of RMBS originators and trustees, said analysts from the rating agency at a breakfast meeting for investors held last week. The breakfast forum was entitled, "How Criteria Becomes Credit Enhancement."

According to Fitch Managing Director Diane Pendley, the originator review process was developed in response to the increased risk in today's environment. The list of risks includes marginal credit standards, inflated property valuations, the increased reliance on technology, and the potential for risk layering within a loan, etc.

Fitch, which did its first originator review in April, has so far completed three onsite originator reviews, including one on Option One Mortgage Corp. Fitch also reviewed another subprime originator as well as an Alt-A originator. Going forward, additional reviews are scheduled involving an originator with six different product types. Analysts expect, however, that there would be more subprime originator reviews relative to other product types, at least in the near term.

In connection with these efforts, and as mentioned earlier, Fitch recently released an originator report on Option One. In the report, Fitch mentioned that the firm's strengths include having an experienced and stable management team and maintaining an extensive risk management environment over its product sources and processes.

For instance, Option One adopted a more conservative credit stance by emphasizing increased credit quality through incorporating minimum FICO scores and introducing higher credit quality programs. However, the company also faces challenges such as the effects of interest rate changes on future production levels and the problems related to managing its manual underwriting.

Analysts at the breakfast said that one advantage of ramping up their review efforts on this front is that they are able to suggest ways for originators to improve their operations. At this point, however, they have not yet determined what kind of impact these reviews would have on the ratings of deals as well as on credit enhancement levels.

Trustee reviews

The rating agency is also starting to conduct separate reviews specifically for trustees. In fact, early last week, Fitch came out with a trustee report on Wells Fargo Corporate Trust Services (WFCTS), which would be the first in a series of trustee report that Fitch is planning to release.

Fitch had assigned to WFCTS acceptable trustee status for the firm's RMBS, CMBS, ABS and CDO groups. This designation was based on several factors including the company's financial strength and effective use of technology. The rating agency also noted that WFCTS has "demonstrated master and backup servicing capabilities and strong default and restructuring management practices."

Analysts at the breakfast also conducted a case study on First Franklin Financial Corp. to demonstrate how their rating criteria works on subprime deals. There was also a discussion on re-performing loans.

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