NEW YORK--(BUSINESS WIRE)--With the comment period now closed for its proposed new U.S. RMBS rating criteria, Fitch Ratings is in the process of reviewing market feedback before finalizing its new model.
In addition to feedback received via the commentary mailboxes, Fitch solicited additional feedback directly from numerous RMBS investors, regulatory agencies and research firms. Feedback was widely positive and constructive across the variety of market participants that shared their perspective on Fitch's new approach to modeling credit risk in new issue RMBS transactions.
In particular, the vast majority of respondents were supportive of Fitch's plan to implement a more forward-looking, and countercyclical modeling framework based on projected home price movements where credit enhancement increases as risk enters the system and declines when risk is neutralizing.
Key market feedback fell into five main categories:
Stress Levels:
--Numerous market participants commented that they believed that the rating stresses being applied by Fitch for high investment grade levels ('AAA', 'AA' and 'A') were potentially too conservative. This was most notable for regional housing markets that are at or near-equilibrium home prices.
Model Inputs:
--Several commentators requested additional clarity on key model inputs. This includes the sustainable market value decline (SMVD) variables derived from the sustainable home price model and the regional economic risk factor provided by University Financial Associates. Commentators also stressed the importance of more granular SMVD assumptions beyond the state level.
Debt-to-Income Ratios:
--A number of commentators indicated that they had expected the 'debt-to-income' variable to have a greater influence on default rates. There was recognition, however, that the volume and quality of data available to support this conclusion was limited.
Risk Premium:
--While market participants generally agreed with the 'risk premium' variable conceptually, they questioned its practical application given current mortgage funding dynamics and liquidity challenges. Others also argued that its predictive power is being captured by other variables in the model, including FICO.
Other Variables:
--Some parties suggested incorporating other variables in the model including adjustments for loan seasoning, considerations for self-employed borrowers, and distinctions by loan origination channel.
Once finished reviewing market comments, Fitch plans to incorporate final changes to the model, with the goal of publishing final criteria within the next 60 days. Once finalized, Fitch will apply the criteria to pools of newly originated, prime mortgage collateral along with its rated prime RMBS transactions.
Fitch's 'U.S. Prime RMBS Loan Loss Model Criteria: Exposure Draft,' is available at 'www.fitchratings.com' or by clicking on the link below.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
U.S. Prime RMBS Loan Loss Model Criteria: Exposure Draft
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=597625
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