Fitch Ratings has responded to the subprime market turmoil by revising its criteria for measuring mortgage default and loss risk for newer vintages. The methodology now takes into account current credit risks that have sent the U.S. RMBS market into a tailspin, including high-risk loans, significant changes in adjustable-rate mortgages and declining home prices in certain regions.
"I think a lot of the risks have been surfaced around products, but the home price environment could continue to worsen," said Glenn Costello, Fitch managing director and RMBS co-head. "That's certainly the single largest risk to additional deterioration of performance versus what we've already seen." The rating agency's estimates of regional home price declines are based on forecasts provided by University Financial Associates that are incorporated into Fitch's ResiLogic default and loss model. "If home prices continue to decline, the borrower who may find themselves with little or no equity will increase so if they get into trouble in terms of making their payments they won't be able to work out of that," Costello added.