Last week Fitch Ratings downgraded Farringdon Mortgages 1, a U.K. nonconforming RMBS transaction (ASR, 04/24/06). The rating agency said this was the first downgrade on record for the sector.
The single-A, triple-B and double-B rated notes were lowered to single-A minus, triple-B minus and single-B, respectively. The ratings actions result from a high level of arrears and expenses in the deal that culminated in a reserve fund draw for FM1 in April 2006. The draw, a total of GBP216,187 ($404,555), represented 15.76% of the available first loss and took the reserve fund below the level it was at closing. Fitch's analysis factored in revised assumptions on delinquency and expenses.
In the revised analysis, the rating agency found that there was insufficient credit enhancement and liquidity support available for the mezzanine and subordinated tranches to survive Fitch's stress scenarios at the rating levels originally assigned.
Transactions tapping reserves is fast becoming a trend among U.K. deals. Farrigdon's draw followed Southern Pacific Securities 2004-2 draw in March and that trailed on the year-end draws made on three of the Residential Mortgage Securities deals from Kensington Mortgages. However, the function of the reserve funds is to provide cash in times of need, so drawings will not necessarily lead to downgrades, said Charlotte Eady, an analyst at Fitch. "The Farringdon downgrade was different given that the reserve fund was well below its target level at the time of the draw," she said. "Furthermore, the high arrears levels combined with the extraordinary expenses this quarter have exacerbated the low excess spread position."
Although some subprime deals were encountering difficulties, others have performed well within expected levels. The Britannia Building Society's Leek series of deals and GMAC-RFC's RMAC series, which are positioned well below the overall Fitch U.K. subprime index of performance data, including delinquency and repossession statistics best illustrate this point. "The Farringdon portfolio consists of heavy adverse borrowers, while many of the GMAC pools include "near prime" borrowers," Eady said.
Fitch said that the transaction servicer Crown Mortgage Management has hired additional staff, increased training, extended call-centre coverage and is trailing new technology to chase arrears and improve its loss mitigation tactics. Third-party insolvency practitioners have also been engaged to offer debt counseling to borrowers in difficulty.
The rating agency will continue to monitor arrears closely to assess whether these initiatives will lead to sustained stabilization of arrear levels and collection rates.
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