Fitch Ratings has downgraded 18 tranches and affirmed two tranches of the Madrid RMBS I, II and III transactions following a performance review.

This included the downgrades of 'AAA' tranches. The downgrades reflect the deteriorating performance of the underlying pools as the three transactions have seen defaults well above expectations and due to the high LTV nature of the loans in the pools in a decreasing housing market, expected recoveries are likely to be lower.

The rating agency also downgraded the 'AAA' tranche from specialized Spanish lender UCI, which is seeing high arrears levels within its Spanish Fondo de Titulizacion de Activos UCI securitization series. The downgrades are a result of poor performance based on UCI lending criteria in recent years. 

The transactions recently drew on reserve funds, as a result rising defaults loans in arrears of more than 18 months. Reserve fund draws stand at 3.63%, 12.96% and 6.69%, respectively. Fitch expects significant further reserve fund draws in all four transactions due to the large pipeline of late stage arrears that will need to be provisioned for in the upcoming payment defaults.

Societe Generale analysts said that while they do not expect triple-A tranches to face principal losses, the consequence for investors forced to sell these tranches will clearly be very damaging.

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