Fitch Takes Various Rating Actions on 26 FHA/VA U.S. RMBS Deals

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has taken various rating actions on 26 Federal Housing Administration/U.S. Department of Veteran Affairs (FHA/VA) U.S. residential mortgage-backed securities (RMBS) transactions in the course of its ongoing RMBS reviews.

Fitch reviewed 128 classes; 53 classes were affirmed while 75 classes were downgraded. Of the 75 classes that were downgraded, four were placed on Rating Watch Negative pending further analysis of the transaction.

Rating Highlights:

--41% of the ratings were affirmed, and 59% of the ratings were downgraded.

--71% of the investment grade ratings remained investment grade after this review.

--10 'AAAsf' classes were downgraded due to actual and/or projected interest shortfalls that were not recovered in stressed rating scenarios.

--Eight classes remained 'AAAsf' with a Stable Rating Outlook due to a wrap provided by Freddie Mac.

A spreadsheet detailing Fitch's rating actions on the affected transactions can be found on Fitch's web site at 'www.fitchratings.com' by performing a title search for 'FHA/VA RMBS Rating Actions for Sept. 13, 2011', or by using the link below.

The negative rating actions were driven by a more robust cashflow analysis, and the application of rating cap policies introduced over the past year for small pools and for bonds vulnerable to interest shortfalls in stressed scenarios.

The cashflow analysis generally indicated increased credit risk for the bonds due to two factors. First, the transactions are generally paying a significant portion of the principal collected to the subordinate classes. While this is expected to allow for high principal recoveries on distressed subordinate classes, it reduces the credit support available to absorb future loan losses and increases the risk of a principal loss for more senior classes.

The second increased risk factor apparent in the cashflow analysis is the reduced interest collections available due to loan modifications. The reduced interest has increased the risk of interest shortfalls for a number of bonds and is reflected in the rating revisions.

The underlying collateral for these transactions consists of mortgage loans insured by the Federal Housing Administration (FHA) and partially guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Although the mortgage loans are insured, the certificates will generally not be guaranteed, with the exception of eight senior classes wrapped by Freddie Mac and two senior classes wrapped by Fannie Mae. To maintain the FHA insurance, VA guaranty or RHS guaranty on the mortgage loans, the master servicer must service the mortgage loans in accordance with the regulations of the applicable federal agency. To minimize losses on mortgage loans, the FHA requires, the VA encourages and the RHS permits the master servicer to use loss mitigation techniques, including forbearance agreements, 'streamline refinancing', pre-foreclosure sales and modification agreements. The mortgage loans are secured by first liens on one- to four-family residential real properties and had been reperforming at deal closing.

When determining each collateral pool's projected base-case loss, Fitch incorporated observed deal-level and sector-level performance trends. The average severity used in this review was approximately 12%, but varied by pool depending on the actual severity history and the percentage of FHA, VA, and RHS loans in the transaction. The insurance provided by the FHA, VA, and RHS resulted in significantly lower severities compared to non-insured RMBS transactions. To determine the probability of default, Fitch used vintage average default assumptions derived from pre-2005 vintage Subprime loans that were adjusted based on each pool's performance. The average probability of default (PD) for the transactions was approximately 33%.

The average updated expected collateral loss as a percentage of the original pool balance is 1.49% with losses ranging from 0.44%-7.34%. As a percentage of the remaining pool balance, the average expected loss is 4.16% with losses ranging from 1.30%-23.73%. The remaining pool balances of the reviewed transactions that closed between 1997-2006 have paid down to approximately 12% of the original pool balances on average.

After determining each pool's projected base-case and stressed scenario loss assumptions, Fitch performed cash flow analysis to determine each bond's principal recovery and projected interest shortfall in the 'Bsf-AAAsf rating stresses. Fitch's cash flow analysis assumed 100% servicer advancing on delinquent loans in the 'Bsf' to 'AAsf' rating stresses, generally consistent with the current practices of the servicers on these mortgage pools. Due to the insurance and resulting low loss severities, Fitch expects servicer advancing rates to generally be higher for these pools than other RMBS sectors. As a stress to reflect a low likelihood risk, Fitch haircut the servicing advancing rates in the 'AAAsf' stress. Further details regarding Fitch's cash flow assumptions are described in the July 8, 2011 report 'U.S. RMBS Surveillance Criteria'.

The spreadsheet 'FHA/VA RMBS Rating Actions for Sept. 13, 2011' provides the contact information for the performance analyst for each transaction.

Additional information is available at 'www.fitchratings.com'.

Related Research:

--'U.S. RMBS Surveillance Criteria' (July 8, 2011);

--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);

--'U.S. RMBS Criteria for Recovery Ratings' (July. 11, 2011);

--'Counterparty Criteria for Structured Finance Transactions' (March 14, 2011);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 2011);

--'Criteria for Rating Caps in Global Structured Finance Transactions' (June 23, 2010);

--'Considering Small Loan Count' (Nov. 16, 2010).

Applicable Criteria and Related Research: FHA/VA RMBS Rating Actions for Sept. 13, 2011

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651377

U.S. RMBS Surveillance Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=640869

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569

U.S. RMBS Criteria for Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642509

Counterparty Criteria for Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605425

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

Criteria for Rating Caps in Global Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648672

Considering Small Loan Count Tail Risk in U.S. RMBS

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=566165

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