Fitch Takes Various Actions on 69 U.S. Second Lien & HELOC RMBS Deals

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has revised loss expectations and taken various rating actions on 69 U.S. Second Lien and HELOC RMBS transactions. A detailed list of the rating actions is available at www.fitchratings.com by performing a title search for 'U.S. RMBS Second Lien and HELOC Rating Actions for Oct. 5, 2012' In addition, a summary of the mortgage pool and bond analysis can be found by performing a title search for 'RMBS Loss Metrics.'

Fitch's rating actions are as follows:
--580 affirmed classes;
--1 upgraded class;
--52 downgraded classes.

Collateral performance for the sector has generally remained stable over the last year. The negative rating actions are driven by continued deterioration in credit enhancement, increased expected loss assumptions consistent with enhancements to Fitch's non-prime loss model released in August 2012 and revisions to Fitch's cash flow analysis stress scenarios.

As of this review, the average percent current increased slightly to 89.21% from 86.57%, the average losses to date increased to 29.83% from 28.63%, and the average 60+ days delinquent decreased to 8.17% from 10.16%.

Fitch's average base-case losses are provided below:

Subprime Fixed-Rate Closed-End Second Lien Transactions:
--Pre-2005 vintages: 22%;
--2005 vintage: 65%;
--Post-2005 vintages: 85%.

Variable-Rate HELOC Transactions
--Pre-2005 vintages: 34%;
--2005-2006 vintages: 71%.

Although Fitch relies on loan-level analysis for the majority of the agency's rated portfolio in the Prime, Alt-A and Subprime sectors, Second Lien and HELOC transactions are generally analyzed using pool-level collateral data. For currently performing loans, Fitch assumes future default behavior will be consistent with expected non-prime first lien default behavior. Default assumptions were determined using the vintage averages of Fitch's new non-prime loss model and were not adjusted for pool specific performance. Fitch's new non-prime loss model generally assumes higher defaults rates for borrowers with negative equity than Fitch's prior model. Consequently, Fitch's new projected default assumptions for performing loans in the mortgage pools reviewed are higher than in prior reviews. For delinquent loans, Fitch assumes 100% probability of default. Fitch assumes 100% loss severity for all loans projected to default

Once Fitch determined the base case assumptions, the 'BBsf-AAAsf' stressed assumptions were determined using Fitch's new non-prime loss model default and severity multiples.

For cash flow analysis of second lien transactions, Fitch assumes default rate and prepayment rate trends will remain stable in the base-case. Fitch assumes no servicer advancing on delinquent loans. Projected cash flows are stressed with interest rate stresses and a haircut to the projected loan coupons in the 'Asf-AAAsf' scenarios to simulate an increase in modifications.

To determine ratings, a committee reviewed the cash flows for each class focusing on the amount and timing of the projected principal and interest recoveries in various stress scenarios.

The poor performance of the collateral to date had previously resulted in significant downgrades on the bonds in earlier rating reviews. Approximately 90% of the bonds reviewed had a rating below 'Bsf' prior to this review. The bonds which retain investment-grade ratings and the class which was upgraded as part of this review generally benefit from significant credit support and, in most cases, a sequential payment priority.

The classes that were affirmed with a stable rating outlook have sufficient credit enhancement to withstand losses in their current rating stress. One class was upgraded one rating category due to 100% recovery in the 'AAAsf' rating stress and less than two years to pay off. Of the 52 classes that were downgraded, 33 were one-rating category downgrades and 19 were two category downgrades. The spreadsheet 'U.S. RMBS Second Lien and HELOC Rating Actions for Oct. 5, 2012' provides the contact information for the performance analyst.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'U.S. RMBS Surveillance Criteria' (Aug. 10, 2012);
--'U.S. RMBS Loan Loss Model Criteria' (Aug. 10, 2012);
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions' (Aug. 2, 2012).

Applicable Criteria and Related Research: U.S. RMBS Second Lien and HELOC Rating Actions for Oct. 5, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691430

Counterparty Criteria for Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678938
Criteria for Interest Rate Stresses in Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=673560
Criteria for Rating Caps in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684737
U.S. RMBS Surveillance Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685739
U.S. RMBS Loan Loss Model Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685646
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679923
Structured Finance Recovery Estimates for Distressed Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557

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