Fitch Ratings is finalizing its new model framework for determining loan losses on pools of U.S. prime residential mortgage loans, which includes several important updates. Chief among them is the application of a proprietary sustainable home price model (SHP Model) that measures a property's current price against its sustainable value. The SHP model allows Fitch to take a forward looking, countercyclical view on the potential for negative equity, which has shown to strongly influence borrower default behavior.
Fitch's SHP model uses macroeconomic and mortgage market factors to determine fundamental or sustainable home prices at the state level. A core principle is that if actual home prices are above levels supported by underlying economic and housing fundamentals (indicating the risk of an asset bubble), they will revert to sustainable levels over time.