Fitch Reviews U.S. Prime RMBS Sector

Fitch Ratings has taken various rating actions on 12,332 classes in 884 U.S. Prime residential mortgage backed security (RMBS) transactions.

Rating Action Summary:
--11,353 classes (92%) affirmed;
--122 classes (1%) upgraded;
--857 classes (7%) downgraded.

A majority of the classes downgraded held ratings of 'CCCsf' or lower prior to the rating review.

A spreadsheet detailing the actions can be found on Fitch's website by performing a title search for 'U.S. RMBS Rating Actions for Jan. 24, 2014' or by clicking the link. In addition, a summary of the mortgage pool and bond analysis can be found by performing a title search for 'RMBS Loss Metrics.'

KEY RATING DRIVERS

The performance of prime RMBS loans has improved in aggregate over the last two years. The percentage of borrowers that are 60 or more days past due is roughly 200 basis point (bps) lower (10.5%) than its peak in early 2012 (12.5%). The improvement was most visible in loans from 2005-2007 transactions, and was primarily driven by rapid home price growth and a favorable interest rate environment. However, in the last six months, the rate of improvement has slowed and December showed the first meaningful increase in delinquency rates for the prime sector in over two years. The recent deterioration in performance coincides with slower home price growth and a roughly 100 bps increase in mortgage rates.

Unlike the sector as a whole, prime transactions issued prior to 2005 did not experience performance improvement over the last two years. The serious delinquency rate for pre-2005 transactions has increased steadily since the onset of the crisis. This deterioration is likely driven by adverse selection among the remaining borrowers who have been unable to take advantage of the lower interest rates and refinance.

Over half of the classes that were downgraded previously held a distressed rating and two-thirds were previously non-investment grade. Nearly all the classes that were downgraded from an investment grade rating are from transactions issued before 2005. The negative rating actions were driven in part by the continued performance deterioration of pre-2005 collateral.

Another significant driver of downgrades from investment grade ratings was small remaining loan counts in the underlying mortgage pools. Fitch generally increases its default expectations for pools with a weighted average number of loans (WAN) under 100 to account for the greater idiosyncratic default risk posed by a small number of loans. In addition, rating caps are applied to classes backed by pools with a WAN under 75.

RATING SENSITIVITIES:

A detailed list of Fitch's updated probability of default, loss severity, and expected loss can be found by performing a title search for 'RMBS Loss Metrics' at www.fitchratings.com. The report provides a summary of base-case and stressed scenario projections.

Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less-likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.

In addition to increasing mortgage pool losses at each rating category to reflect increasingly stressful economic scenarios, Fitch analyzes various loss-timing, prepayment, loan modification, servicer advancing, and interest rate scenarios as part of the cash flow analysis. Each class is analyzed with 43 different combinations of loss, prepayment and interest rate projections.

Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.

The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline further in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.

The spreadsheet 'U.S. RMBS Rating Actions for Jan. 24, 2014' provides the contact information for the performance analyst.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'U.S. RMBS Surveillance Criteria' (Oct. 10, 2013);
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'U.S. RMBS Loan Loss Model Criteria' (Aug. 9, 2013);
--'U.S. RMBS Cash Flow Analysis Criteria' (April 19, 2013);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013);
--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions' (June 12, 2013);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 2013);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 18, 2011).

Applicable Criteria and Related Research: U.S. RMBS Rating Actions for Jan. 24, 2014
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732515

U.S. RMBS Surveillance Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720170
U.S. RMBS Cash Flow Analysis Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705655
Criteria for Interest Rate Stresses in Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695535
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661
U.S. RMBS Loan Loss Model Criteria -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727095
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709840
Structured Finance Recovery Estimates for Distressed Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656557

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http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816987
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Fitch Ratings
Presenting Analyst:
Ryan O'Loughlin, [phone]
Analyst
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
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Managing Director
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