Fitch Seeks Comments on Proposed Enhancements to US RMBS Loan Loss Model Criteria

On Monday, February 8th, Fitch Ratings announced several proposed changes to its U.S. RMBS Loan Loss Model Criteria for which it is seeking comments. The enhancements come after an annual review of its loan loss model which incorporated newly available data into the model analysis and updated backtesting of model projections. According to Fitch, the key proposed enhancements include:

  • A revision to the distressed sale adjustment reflecting new agency historical data;
  • A cure-rate adjustment for borrowers who default but have enough equity to resolve the default without a loss;
  • A simplification of the liquidation timeline projections and stresses;
  • Modest changes to originator quality adjustments; and
  • A reduction in the geographic concentration penalty.

Fitch expects the changes to have a modest impact on loss projections and ratings. For borrowers with strong equity positions, Fitch expects to see a lower default assumption due to a cure-rate adjustment. However, for prime conforming balance loans, the rating agency expects higher loss severities due to an increase in the distressed sale adjustment.

Comments on its Exposure Draft are due to Fitch on March 8th.

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