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Rapid Alt-A Deterioration

Fitch reviewing ratings on 2005-2007 Alt-A transactions

March 7, 2008

By MortgageDaily.com staff

Alternative-A loans behind residential mortgage-backed securities have seen a sharp increase in defaults as home prices continue falling, available loan programs contract and delinquent borrowers become more willing to walk away.

The rapid deterioration in Alt-A performance has prompted Fitch Ratings to take a closer look at the 417 Alt-A transactions it rates, including 138 adjustable-rate mortgage deals and 279 fixed-rate deals. The review involves $160 billion in RMBS, which have already been placed on Rating Watch Negative.

The ratings agency expects to complete it review of the deals by next month.

Fitch said there are $10 billion of subordinate Alt-A RMBS that face the most pressure from rising defaults. Subordinate classes from 2005 to 2007 transactions that Fitch has taken ratings actions on number 199.

"Accelerating home price declines partly due to the recent dramatic contraction in the non-agency mortgage origination and securitization markets has been the primary catalyst of the Alt-A performance downturn," Fitch Managing Director Glenn Costello said in the statement. "This development has effectively eliminated the option to sell or refinance a home for many borrowers."

Delinquency of at least 60 days has reached 8.6 percent on fixed-rate transactions from 2006 and 13.6 percent on ARM transactions, according to the announcement. Historically, Alt-A delinquency had been between 1 percent and 2 percent.

Lifetime loss rates estimates on the 2006 vintage 'B' tranches have risen to 2.9 percent on fixed-rate loans and 3.1 percent for hybrid ARMs. On 2007 vintage 'B' tranches, loss rates on fixed-rate deals have jumped to 3.4 percent while they have risen to 4.1 percent for 'B' ARM classes.

The New York-based agency noted its analysis is based on a 25 percent home price decline from the peak in 2006. Another factor is the willingness of Alt-A borrowers with high loan-to-values to walk away from properties.

"This behavior appears to be largely attributable to the use of high risk mortgage products such as 'piggy-back' second liens and stated-income documentation programs, which in many instances were poorly underwritten and susceptible to borrower/broker fraud," the statement said. "While Alt-A mortgage pools represent a broad range of borrower and loan characteristics, these risk factors are present in many Alt-A transactions."

Fitch explained that falling mortgage rates and the recently enacted economic stimulus package could positively influence Alt-A default and loss rates.

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hard money lending. Home-equity loans and home-equity lines of credit.

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