Editor’s Pick: RMBS: Drivers of 2006 Subprime Vintage Performance
RMBS: Drivers of 2006 Subprime Vintage Performance
FitchRatings / Glenn Costello, Suzanne Mistretta, Celcia He
“The 2006 subprime vintage performance is remarkable for the magnitude of early mortgage defaults, given a benign economic environment apart from home prices. The early deterioration in 2006 vintage performance is attributable to a confluence of the following factors:
• The precipitous decline in home prices that began in mid-2006. Fitch has found that even subprime loans of average risk are defaulting at elevated levels.
• The prevalence of simultaneous second-lien (SSL) lending and loan programs with limited or no income verification (statedincome loans).
• Weak underwriting and overemphasis by lenders on higher Fair Isaac & Co. (FICO) scores to counter the added risk associated with the stated income and SSL attributes.
• Growing evidence of aggressive or fraudulent use of stated income, misrepresentation of occupancy status by speculators, and“credit doctoring.
Fitch has revised its loss expectations and downgrade methodology for 2006 subprime RMBS to reflect the resultantheightened default risk. The combined effect of the revisions to Fitch’s assumptions resulted in a higher average lifetime expected loss (EL) projection of approximately 10%. The higher EL resulted in the downgrade actions taken by Fitch through Sept. 30, 2007.”
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