(The following statement was released by the rating agency)Link to Fitch Ratings' Report: U.S. RMBS Qualified and Non-Qualified Mortgage Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740197 NEW YORK, March 17 (Fitch) Fitch Ratings has finalized its criteria for analyzing loans securing U.S. RMBS under the qualified mortgage (QM) standards and Ability-to-Repay rule (the Rule) recently adopted by the Bureau of Consumer Financial Protection (CFPB).Fitch has developed assumptions regarding the probability of challenges to the Rule (and/or QM status) as well as the potential costs or damages. The assumptions reflect a low probability/high severity scenario. 'We expect some defaulted borrowers will likely challenge the Rule, but a lack of legal precedent could make the first few cases high profile and prone to significant legal costs,' said Senior Director Suzanne Mistretta.Fitch will make upward adjustments to its credit enhancement calculations if the originator designates the loan as higher priced QM (HPQM) or non-QM. Loans identified by the lender and confirmed by third party due diligence as safe harbor QM (SHQM) will not receive an adjustment.Fitch assumes that the maximum number of borrower challenges for HPQMs and non QM loans is the pool's lifetime probability of default (PD) derived from Fitch's mortgage loan loss model. This population is narrowed further to reflect only those borrowers likely to default within five years of origination. The likelihood of challenge is also driven by whether the foreclosure process is judicial or non-judicial based on the state in which the property is located. The PD assumption is the starting point for challenges to the Rule. As such, 'lower credit quality pools will see a larger effect on credit enhancement relative to higher credit quality pools primarily due to their higher probability of default and smaller loan balances,' said Mistretta. Fitch will differentiate between structures that provide for expenses to be paid from available funds and those that deduct expenses from the mortgage pool's net weighted average coupon (Net WAC). Where trust expenses are paid from available funds, additional subordination will be expected. Where expenses are absorbed by the pool's Net WAC and the note rate is capped at the Net WAC, Fitch will not adjust its loss expectation for the pool. Although expenses are borne by both senior and subordinated investors, this provision does not affect the trust's ability to pay contractual amounts due. The loan designation and determination of potential challenges and legal costs and damages will be highly dependent on the results of Fitch's review of the originator's/aggregator's underwriting guidelines and origination processes. The Rule applies to all mortgages for which loan applications were received on or after Jan. 10, 2014. The Rule requires lenders to make a reasonable determination of a borrower's ability to repay the loan at the time of consummation. In addition, depending on the loan product, features and pricing, the Rule affords creditors (and their assignees) varying degrees of protection against borrower disputes in the form of a safe harbor or rebuttable presumption of compliance with the Rule.The finalization of the criteria follows the conclusion of Fitch's request for comment made in Fitch's Nov. 12, 2013 special report 'U.S. RMBS: Ability-to-Repay and Qualified Mortgage Rule Approaches" . The criteria is detailed in the report published today, available at the above link, and should be read in conjunction with Fitch's "U.S. RMBS Loan Loss Model Criteria" and "U.S. RMBS Originator Review and Third-Party Due Diligence Criteria."Contact: Suzanne MistrettaSenior Director +1-212-908-0639Fitch Ratings Inc., 1 State Street Plaza, New York, NY 10004 Vanessa PurwinSenior Director+1-212-908-0269 Diane PendleyManaging Director +1-212-908-0777Grant BaileyManaging Director +1-212-908-0544Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com.Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research:--'U.S. RMBS Loan Loss Model Criteria' (December 2013);--'U.S. RMBS Originator Review and Third-Party Due Diligence Criteria' (April 2013);--'U.S. RMBS Rating Criteria' (July 2013);--'U.S. RMBS Representations and Warranties Criteria' (June 2013);--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2013);--'Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum' (May 2013);--'Global Structured Finance Rating Criteria' (May 2013).Applicable Criteria and Related Research: Counterparty Criteria for Structured Finance and Covered Bondshttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707155 U.S. RMBS Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=713083 U.S. RMBS Originator Review and Third-Party Due Diligence Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707072 Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendumhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=707156 Global Structured Finance Rating Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661 U.S. RMBS Loan Loss Model Criteria -- Amendedhttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727095 U.S. RMBS Representations and Warranties Criteriahttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=711402 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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March 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has finalized its criteria for analyzing loans securing U.S. RMBS under the qualified mortgage (QM) standards and Ability-to-Repay rule (the Rule) recently adopted by the Bureau of Consumer Financial Protection (CFPB).
Fitch has developed assumptions regarding the probability of challenges to the Rule (and/or QM status) as well as the potential costs or damages. The assumptions reflect a low probability/high severity scenario. 'We expect some defaulted borrowers will likely challenge the Rule, but a lack of legal precedent could make the first few cases high profile and prone to significant legal costs,' said Senior Director Suzanne Mistretta.
Fitch will make upward adjustments to its credit enhancement calculations if the originator designates the loan as higher priced QM (HPQM) or non-QM. Loans identified by the lender and confirmed by third party due diligence as safe harbor QM (SHQM) will not receive an adjustment.
Fitch assumes that the maximum number of borrower challenges for HPQMs and non QM loans is the pool's lifetime probability of default (PD) derived from Fitch's mortgage loan loss model. This population is narrowed further to reflect only those borrowers likely to default within five years of origination. The likelihood of challenge is also driven by whether the foreclosure process is judicial or non-judicial based on the state in which the property is located.
The PD assumption is the starting point for challenges to the Rule. As such, 'lower credit quality pools will see a larger effect on credit enhancement relative to higher credit quality pools primarily due to their higher probability of default and smaller loan balances,' said Mistretta.
Fitch will differentiate between structures that provide for expenses to be paid from available funds and those that deduct expenses from the mortgage pool's net weighted average coupon (Net WAC). Where trust expenses are paid from available funds, additional subordination will be expected. Where expenses are absorbed by the pool's Net WAC and the note rate is capped at the Net WAC, Fitch will not adjust its loss expectation for the pool. Although expenses are borne by both senior and subordinated investors, this provision does not affect the trust's ability to pay contractual amounts due.
The loan designation and determination of potential challenges and legal costs and damages will be highly dependent on the results of Fitch's review of the originator's/aggregator's underwriting guidelines and origination processes. The Rule applies to all mortgages for which loan applications were received on or after Jan. 10, 2014. The Rule requires lenders to make a reasonable determination of a borrower's ability to repay the loan at the time of consummation. In addition, depending on the loan product, features and pricing, the Rule affords creditors (and their assignees) varying degrees of protection against borrower disputes in the form of a safe harbor or rebuttable presumption of compliance with the Rule.
The finalization of the criteria follows the conclusion of Fitch's request for comment made in Fitch's Nov. 12, 2013 special report 'U.S. RMBS:
Ability-to-Repay and Qualified Mortgage Rule Approaches" . The criteria is detailed in the report published today, available at the below link, and should be read in conjunction with Fitch's "U.S. RMBS Loan Loss Model Criteria" and "U.S. RMBS Originator Review and Third-Party Due Diligence Criteria."
Link to Fitch Ratings' Report: U.S. RMBS Qualified and Non-Qualified Mortgage Criteria
((Bangalore Ratings Team, Hotline: +91 80 6677 2513, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net))
Keywords: Fitch Finalizes U.S. RMBS Qualified and Non Qualif
