Mortgage fraud and sloppy underwriting on a sample of loans analyzed by one ratings agency led to an overhaul of its process for rating residential transactions. The agency will look more closely at origination and acquisition practices. Meanwhile, no end appears in sight for downgrades on subprime deals, while ratings activity continued to be mostly positive on commercial transactions.
Beginning in January, Fitch Ratings’ process for rating U.S. residential mortgage-backed securities will incorporate a more extensive review of mortgage origination and acquisition practices, including a review of originator, conduit, and, or, issuer due diligence reports, as well as a sample of mortgage origination files, according to an announcement Wednesday. Fitch will conduct the enhanced reviews for all subprime transactions and will not rate them until the review process is complete.
The agency said it updated the process after an analysis on a small sample of early defaults from 2006 Fitch-rated subprime RMBS suggested lax underwriting and fraud may account for up to one-quarter of the vintage’s under performance. Among the findings was the apparent misrepresentation of occupancy, little or no further investigation of suspicious credit report items and miscalculated debt-to-income ratios. In addition, stated income loans were poorly underwritten for reasonability and there were substantial numbers of first-time borrowers with questionable credit and, or, income.
“During the rapidly rising home price environment of the past few years, the ability of the borrower to refinance or quickly re-sell the property prior to the loan defaulting masked the true risk of these products and the presence of misrepresentation and fraud,” a Fitch director said in the announcement.
Fitch said it also intends to conduct enhanced reviews for Alt-A RMBS, though these will be phased-in based on its view of the risk of particular Alt-A programs. High-risk programs, which include pay-option adjustable-rate mortgages and those with substantial risk-layering, will be high priority for review.
Fitch separately announced downgrades on the ratings of nine classes worth over $80 million of Asset Backed Securities Corporation Series 2003-HE2, 2004-HE6 and 2004-HE8 resulted from deterioration in the relationship of credit enhancement to future loss expectations. The majority of the one- to four-family residential loans backing the deal were originated by New Century.
Among subprime transactions recently downgraded by Moody’s Investors Service were CDC Mortgage Capital Trust series 2001-HE1, 2002-HE1 though HE3, and 2003-HE1 through HE4. The negative actions on certain certificates of the CDC deals were based on analysis of credit enhancement provided by subordination, overcollateralization and excess spread relative to expected losses. All the deals have pool factors below 13 percent and are expected to continue seeing deteriorating performance due to the high pipelines, Moody’s announced.
Seven tranches of IXIS Real Estate Capital Trust shelf were downgraded and another was placed on review for downgrade, Moody’s announced. The subprime loans backing the deal is higher than anticipated rates of delinquency, foreclosure, and REO relative to credit enhancement levels.
Subprime loan-backed Equifirst Mortgage Loan Trust 2003-1, 2003-2, 2004-1, 2004-2 and 2004-3 reportedly received downgrades by Moody’s because the bonds’ credit enhancement levels were too low compared to the projected loss numbers for the prior rating levels.
Meanwhile, low credit enhancement levels compared to the current loss projections resulted in downgrades for three subordinate classes of Terwin Mortgage Trust, Series 2004-EQR1, which is collateralized by non-performing, first-lien residential loans and is not performing as anticipated due to rising loss severities, delinquency rates and realized losses, Moody’s said.
And recent and expected pool losses and the resulting actual and expected erosion of credit support reportedly led to lower ratings by Moody’s on certain classes of Specialty Underwriting and Residential Finance Trust series 2003-BC1 through BC3.
An Alt-A loan-backed deal that recently received downgrades by Moody’s was TBW Mortgage-Backed Trust Series 2006-4, which saw ratings lowered on three tranches as a result of higher-than-anticipated rates of delinquency, foreclosure, and real estate owned in the underlying collateral relative to credit enhancement levels.
Fitch placed three classes of Lehman Brothers Inc.’s commercial mortgage pass-through certificates, series 2006 – CCL – C2 for $29 million on Rating Watch Negative due to the transfer of one loan representing 11 percent of the deal to special servicing. One $20 million class was upgraded due to 64 percent paydown since the last rating action.
The agency upgraded two classes of Credit Suisse First Boston Mortgage Securities Corp.’s commercial mortgage pass-through certificates, series 1999-C1 for $56 million as a result of paydown and stable performance since Fitch’s last rating action.
An upgrade occurred in the rating of the $80 million Class A of R.E. Repack 2002-1 because its sole collateral, Class B of the LNR CDO 2002-1 transaction, was upgraded earlier this year, Moody’s said.
Similarly, the $78 million Class A of LNR Repak 2003-1 reportedly received a better rating by Moody’s due to an upgrade in its collateral, Class B of the LNR CDO 2003-1.
Moody’s also said it issued upgrades to the ratings of three classes in GFCM LLC, Commercial Mortgage Pass-Through Certificates, Series 2003-1 because loan payoffs and amortization have increased credit support.
