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ARMs, Housing Bubble Pose No Risk to RMBS Market, Fitch Says

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ARMs, Housing Bubble Pose No Risk to RMBS Market, Fitch Says

Recent RMBS ratings actions

July 8, 2004


Others may have dire predictions about higher interest rates hurting mortgage activity, but not Fitch Ratings. In a new report the ratings service said that concerns about a bursting home price bubble are overstated.“Although broadly speaking, homes are still reasonably affordable in most markets (versus prior peak comparisons), home prices cannot indefinitely keep climbing much faster than peoples’ incomes, as has been the case during the past few years in certain communities,” Robert Curran, a Fitch senior director, said in a written statement. “However, the risk appears to be local rather than regional or national.”

Fitch said it has also become “reasonably comfortable” with the increasingly use of adjustable-rate mortgages (ARMs) after expressing concern that homeowners may be overextending themselves to acquire homes. “Much of the incremental ARMs …appear to be sourced by buyers of upscale homes making a sophisticated financing decision rather than entry level buyers stretching to buy their home,” Curran said.

Fitch has upgraded from ‘RPS2’ to ‘RPS2+’ the residential primary servicer ratings for Wilshire Credit Corp. The ratings cover subprime, home equity and high loan-to-value products. Fitch said the upgrade is based on Wilshire’s management experience and integrated technology. Wilshire is a subsidiary of Merrill Lynch Mortgage Capital Inc.

Fitch has also affirmed National City Home Loan Services Inc. residential primary servicer ratings for Alt-A and subprime products at ‘RPS2-‘ and its special servicer rating at ‘Rss3+’ for residential mortgages. Fitch said the affirmations reflect the company’s effective loan administration and default management practices, established policies and procedures, focused default training programs, reliable default management methods and multiple levels of internal controls.

Moody’s Investors Services is poised to take action on transactions issued by Amresco that are under review for possible upgrades or downgrades. Considered for downgrades are 11 certificates from five transactions; being looked at for a potential upgrade are 11 certificates from three transactions. The certificates are backed by 30-year fixed rate and ARM home equity loans and are now rated from ‘Aa2’ to ‘B-1F’. Moody’s said the possible downgrades are being caused because existing credit enhancement levels are not sufficient to support current ratings. The mezzanine certificates may be upgraded because of a substantial buildup in credit support.

Fitch has assigned ratings ranging from ‘AAA’ to ‘B’ on the $102 million mortgage pass through certificates series 2004-QS9 issued by Residential Accredit Loans Inc. (RALI). The ratings reflect levels of subordination, credit enhancement and quality of the collateral. The pool of mortgage loans consist of 15-year fixed-rate mortgage loans secured by first liens on one- to four-family residential properties. The pool has a weighted average FICO score of 725 and a weighted average original loan-to-value (LTV) of 67.19%. The loans were originated under GMAC-RFC’s Alt-A program.

Also rated by Fitch is the $739 million series 2004-HE3 issued by Asset Backed Securities Corp. (ABSC) Home Equity Loan Trust. The ratings range from ‘AAA’ to ‘BB+’ and reflect credit enhancement, levels of cash flow and future collateralization. The certificates are collateralized by adjustable and fixed-rate, first lien conforming and nonconforming mortgage loans with weighted average original LTVs ranging from 77.80% to 77.35%.

A $1.5 billion issue of mortgage backed pass-through certificates issued by Credit Suisse First Boston Mortgage Securities Corp. has been rated from ‘Aaa’ to ‘Ba2’ by Moody’s. The securitization is backed by adjustable-rate jumbo, conforming balance and Alt-A mortgage loans. Moody’s said the ratings are based primarily on credit quality and level of subordination along with protection from excess spread and overcollateralization.

Meanwhile, Moody’s has issued ratings from ‘Aaa’ to ‘Baa2′ on the $365 million of mortgage backed securities issued by Residential Funding Corp.’s RALI Series 2004-QA2 trust, a securitization of prime quality, adjustable rate Alt-A residential mortgage loans. The ratings are attributed to credit support from subordination, overcollateralization and excess spread. Moody’s said the relatively low LTV ratio of 77.88% and 75.70% outweighs the risk associated with the loans’ hybrid coupon. The weighted average FICO scores ranged from 720 to 718.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at:

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