Fitch Ratings has downgraded seven classes from six HECM Reverse Mortgage Transactions reflecting an increased risk of uninsured loss.
Fitch has downgraded the following ratings:
Mortgage Equity Conversion Asset Corporation 2006-SFG1
--Class A (61910RAA9) to 'Asf' from 'AAAsf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2006-SFG2
--Class A (61910YAA4) to 'Asf' from 'AAAsf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2006-SFG3
--Class A (61911AAA5) to 'Asf' from 'AAAsf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2007-FF1
--Class A (61910AAA6) to 'Asf' from 'AAAsf'; Outlook Stable.
Mortgage Equity Conversion Asset Corporation 2007-FF3
--Class A (61911GAA2) to 'Asf' from 'AAAsf'; Outlook Stable;
--Class IO (61911GAB0) to 'Asf' from 'AAAsf'; Outlook Stable.
RiverView HECM Trust 2007-1
--Class A (769422AA4) to 'BBBsf' from 'AAAsf'; Outlook revised to Negative from Stable.
Home equity conversion mortgages (HECM) are Federal Housing Administration (FHA) reverse-mortgage loans insured by the U.S. Department of Housing and Urban Development (HUD) and secured by one-to-four-family, first lien, residential properties. Unlike most forward mortgages, reverse mortgage loan balances can increase due to draws, accrued interest or incurred expenses. Servicers can assign the loan to HUD for repayment once the loan balance has increased to 98% of a maximum claim amount determined at origination.
The loans can experience a maturity event requiring repayment in full upon vacating the property or death. If a maturity event occurs prior to the servicer assigning the loan to HUD and the borrower or the borrower's estate is unable to repay the loan in full, the servicer may initiate foreclosure on the property.
If the foreclosed property becomes Real-Estate-Owned (REO) and remains in REO over six months, the insurance proceeds will be determined by the FHA based on a full appraisal of the property. If the property ultimately is sold for less than the appraised amount, the trust could experience unexpected uninsured losses.
The negative rating actions reflect an increased risk of uninsured losses occurring when a HECM property becomes REO.
Due to the stress experienced in the housing market over the past several years, an increased number of HECM loans are maturing in a negative equity position resulting in an increased number of foreclosures. The weak housing market has also resulted in an increased number of foreclosures ultimately becoming REO and taking longer than six months to liquidate. Historically, roughly 25% of non-agency loans which entered foreclosure ultimately liquidated after more than six months in REO. This percentage approached 50% as home prices fell and REO inventory swelled.
To estimate the likelihood of uninsured losses from REO liquidations, Fitch assumed all loans in a negative equity position at the time of a maturity event would enter into foreclosure.
To determine a borrower's current equity position, Fitch used the original appraisal, adjusted to today's value with the Case-Shiller index and Fitch's proprietary sustainable home value model. Consistent with Fitch's RMBS rating methodology, Fitch assumed increasingly higher market-value-declines in the rating stress scenarios when estimating the borrower's equity position. In the 'AAAsf' rating scenario, Fitch assumes market value declines of 35% below a sustainable level.
Fitch also assumed in the rating-stress scenarios an increasingly higher-than-expected percentage of foreclosure loans would liquidate from REO in over six months. Fitch assumed 25% of initiated foreclosed loans in the base-case and 60% of initiated foreclosure loans in the 'AAAsf' scenario would both become REO and liquidate from REO in over six months.
To estimate the amount of the loss due to an extended REO liquidation, Fitch assumed the difference between the liquidation value and the FHA appraised value will be 5% in the base-case and increasingly higher in the rating stress scenarios. In the 'AAAsf' scenario, Fitch assumed the difference will be 30%. These discounts to the appraised values are notably less than typical quick-sale-adjustments applied to distressed sale valuations since the discount in this instance is applied to a full appraisal after the property has been acquired by the servicer, rather than an external appraisal or broker-price-opinion performed at the time of foreclosure initiation.
Fitch predicts the timing and likelihood of maturity events using actuarial tables. While slower-than-expected maturity events can put liquidity pressure on the trust's cashflow, faster-than-expected maturity events can increase the likelihood of uninsured losses since an increasing percentage of maturity events would occur prior to the loan being assigned to HUD due to reaching 98% of the maximum claim. To stress the timing and amount of uninsured losses, Fitch assumed faster-than-expected maturity events. In the 'AAAsf' scenario, Fitch assumed maturity events occurred five years faster-than-expected.
Based on the assumptions described below, Fitch assumed an average uninsured loss of less than 5 bps in the base-case and up to approximately 300 basis points in the 'AAAsf' scenario. Based on current credit enhancement and excess spread, Fitch estimates the bonds are protected against approximately 140 basis points of uninsured mortgage loss on average.
The credit enhancement provided for the rated class in the Riverview HECM 2007-1 was determined to be less than that provided in the other transactions. The 2007-1 required funding account amount has resulted to-date in a weaker assets-to-liabilities relationship. Consequently, the class was assigned a lower rating than those in the other transactions.
In addition to the relationship between the expected losses and credit enhancement, the rating committee also considered the limited amount of available data for the loan-level performance of reverse mortgages when determining credit ratings for the bonds.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June. 6, 2012);
--'U.S. RMBS Surveillance Criteria' (July 8, 2011);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Fitch Revises Practice for Rating IO & Pre-Payment Related Structured Finance Securities' (June 23, 2010).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
U.S. RMBS Surveillance Criteria
Counterparty Criteria for Structured Finance Transactions
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