Initially, news of Kensington Mortgages' non-conforming RMBS, Residential Mortgage Securities tapping its reserve accounts (see ASR 7/4/05) was met with no immediate concern from Fitch Ratings. Just one month later, the rating agency announced that it has affirmed 90 tranches of eight RMS transactions, as well as upgrading one tranche.

Using its default and cashflow models Fitch reported that, following the RMS 15 and 16 reserve draws, the mortgage pools backing these transactions have again been fully re-modeled. The portfolios backing RMS 17 and RMS 18 have also been re-modeled assuming a higher level of arrears for these transactions, relative to their vintage peer group, which could ultimately see draws on the reserve funds in both transactions, according to Fitch.

"Enhanced repossession procedures introduced by Kensington to address problems associated with the underperforming counterparties means that higher losses have been realized sooner than would have been expected otherwise," said Fitch European RMBS Associate Director Alison Ho. "Also, the reserve-fund draws seen to date have been small, and although they are expected to continue in coming quarters, the remodeling of the portfolios has given us comfort that all noteholders will continue to have sufficient protection from losses."

Fitch also affirmed 88 tranches of U.K. nonconforming paper and made a further eight upgrades last week, despite rising delinquencies in this market segment. Analysts said that while the general trend has been one of rising arrears and foreclosure - most transaction have reported an increase in both these areas in the recent reporting period - losses remain low. "Credit enhancement has accumulated through sequential amortization over time, while the arrears positions of the well-seasoned deals remain within expected parameters, conditions which have resulted in the upgrades of certain note tranches listed below," according to Fitch analysts.

Going forward, analysts said it's less likely the market will continue to see RMS tranches upgraded because, as these transactions age the amortization schedule becomes pro-rata from sequential, which, in effect, limits credit enhancement growth. Less credit enhancement, paired with the continuing trend of rising delinquencies, means enhancement levels are likely to remain constant. "In the majority of cases, once the reserve fund reaches its target level, it is scheduled to remain at this amount providing further cushioning to the lower tranches," summed analysts.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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