Standard & Poor’s underestimated potential loss severities in its rating analysis of a $184.9 million securitization called Bayview Opportunity Master Fund IIIa Trust 2014-9RPL, according to Fitch Ratings, which is not rating this re-performing RMBS transaction.

Fitch argues that its rival should have used broker price opinions (BPOs) in appraising property values. 

According to the S&P presale, almost all of the loans in the pool have been modified; 40% have delinquencies on their principal and interest (P&I) payments for the 24 months before the cut-off date, and 30.3% have delinquencies on their P&I payments for the 12 months before the cut-off date.

S&P assigned the deal preliminary ratings on April 28; the ratings agency initially expected to give a triple-A rating to the deal’s senior tranche, sized at $117.6 million.

On May 1, S&P announced that it withdrew its preliminary ratings on the eight classes of notes issued under the trust. The ratings agency said in a statement that it had “requested additional information pertaining to property valuations and loss severity experience” and the issuer responded by delaying the deal beyond the expected close date of May 12, 2014.

Fitch said in a report on Friday that the analysis of the re-performing RMBS deal failed to accurately gauge the risk in the transaction because S&P “elected to disregard the values derived from [BPOs] in lieu of original valuations adjusted for regional market value declines.”

Had S&P used the BPO valuation, it would have increased the average LTV to over 145% versus the approximately 90% LTV that it applied in its own internal modeling.

The “miscalculation” means that there isn’t enough credit enhancement in the deal. “Applying the higher loan to values would result in a roughly 20% increase in projected default probability and 30% increase in projected loss severity for the mortgage pool in the base-case scenario,” wrote Fitch.

Fitch explained in the report that BPO values are a more accurate assessment of a property’s value, for seasoned collateral, than “simple property indexation”. “For distressed or re-performing loans, updated BPO valuations often indicate a value lower than an indexed property value due to some adverse selection of the properties,” according to the report.

The chart below illustrates how S&P intended to rate the deal. 

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