Fitch Ratings: New U.S. RMBS Products Faring Well So Far; Earthquakes No Problem

Two reports from Fitch Ratings, New York, offer positive news on the status of U.S. residential mortgage-backed securities.

Fitch said while a “widening array” of innovative mortgage loans emerging this late in the broader economic cycle will merit some caution for RMBS investors in the coming months; however, they are largely off to a solid start.

Fitch Director Rachel Noonan said more affordability products from HomeReady and Home Possible are making their way into the government-sponsored enterprises’ risk transfer space. Characteristically made up of borrowers with lower FICO scores and higher debt to income ratios, these loans are now encompassing up to 30% of the loans in some risk transfer deals. This has led to Fitch raising its credit enhancement for these loans to better safeguard investors.

The report also noted as non-prime RMBS issuance continues to increase, so has use of alternative income documentation, the rate of which has nearly doubled since 2016. Noonan said Fitch has “particularly heightened caution “of loans containing bank statements to verify income instead of tax returns for self-employed borrowers.

“However, performance of bank statement loans has been solid so far,” Noonan said. “So while not quite enough to soften [our] guarded stance at this time, bank statement loans are an area to keep an eye on to see if they can sustain their strong start.”

In a separate report, Fitch said recent earthquakes in southeast California are not expected to have any effect on the ratings of U.S. RMBS and commercial mortgage-backed securities.

Multiple earthquakes struck southeast California in a sparsely populated area last week east of the Sierra Nevada Mountains. Governor Gavin Newsom (D) declared a state of emergency for San Bernadino County and Kern County.

Fitch said on average, less than 1% of Fitch-rated RMBS pools have exposure to the areas affected by the earthquakes. No negative rating actions are expected for Fitch-rated CMBS with exposure to properties in the region, given servicer advancing, insurance coverage typically required of CMBS loans and strong sponsorship among the larger affected properties.

For RMBS, the effect on residential mortgage performance within the affected areas is likely to be modest if borrower behavior follows patterns similar to those observed over the last 30 years. “Natural disasters since 1990 have only had a temporary influence on borrower behavior, with delinquency typically returning to pre-disaster levels within 12-18 months,” the report said. “The impact on RMBS performance from any disaster in the past 30 years was not meaningful enough to negatively influence bond ratings.”