The rating agencies continue to rework their criteria in an effort to be more transparent in their methodology.
The latest changes are being made to RMBS criteria from Fitch Ratings and Standard & Poor's.
A key component of Fitch’s new approach is the application of its proprietary sustainable home price (SHP) model to adjust a property’s current price to its sustainable value.
The SHP component allows for a forward-looking, countercyclical framework where credit enhancement requirements increase as risk enters the system and decline when risk neutralizes.
The new tool will allow investors to plug in their own economic predictions when running the agency’s model for predicted RMBS losses.
Fitch's updated RMBS criteria also introduces a new variable – sustainable LTV – which represents a borrower's effective equity in the property and is the most predictive variable in the model.
The rating agency also said that the new criteria established a clearer relationship between rating stress levels, home price declines and economic fundamentals.
Meanwhile, S&P is also in the process of changing up its U.K. RMBS ratings criteria. This week the rating agency sought comments on its proposed changes that would align S&P's criteria for U.K. RMBS closely with those for global RMBS. This would also increase credit enhancement levels for all rating categories.
The proposed criteria would revise modeling and cash flow assumptions for S&P's analysis of typical U.K. RMBS transactions. The analysis assesses the adequacy of cash flows from the securitized assets to meet timely payments of interest and, ultimately, principal on an RMBS issue in stress scenarios commensurate with the applicable rating levels.
S&P's model would also adjust the computation of market-value decline and loss severity estimates and would specifically incorporate an adjustment to estimate the degree of over- or undervaluation in the property market as well as a forced-sale discount.
