17 Mar, 2008
Ratings says it's confident most investment-grade UK sub-prime
residential mortgage backed securities ratings can withstand
The ratings agency says it's stress tested UK sub-prime RMBS
against a number of different scenarios such as declining house
prices and increasing defaults.
The study encompassed all of Fitch's rated UK sub-prime RMBS
transactions with ratings outstanding as on December 31 2007.
Gregg Kohansky, senior director and head of Europe, Middle East and
Africa RMBS at Fitch, says: "Challenging conditions in the
mortgage market will undoubtedly result in stretched affordability
and payment shocks for many borrowers during 2008, especially in
the non-conforming segment. This is likely to push many more
borrowers into defaults or delinquencies.
"Our tests showed that the majority of ratings are stable in
all scenarios. Widespread rating migration is only likely when a
'Severe' scenario was applied. That scenario envisages 25%
house price declines in the next 12 months, far in excess of market
Fitch stress-tested the ratings of 876 collateralised tranches in
107 UK non-conforming transactions, rated from 2003 - 2007
The testing found that highly seasoned 2003 to 2005 vintage ratings
are very well positioned to withstand even high levels of stress.
Less seasoned 2006-2007 vintage ratings are likely to remain stable
if house price declines remain within the current expected range of
most market participants.
However, Fitch says ratings may migrate more extensively at lower
rating levels if the housing market is exposed to a much sharper
downturn than currently expected.
The agency says the majority of market commentators predict a flat
to 10% decline in house prices during 2008.
In Fitch's view, the recent trend of moderate negative monthly
declines to house prices is likely to continue given ongoing
funding difficulties for lenders and a slump in prospective
The report "Ratings Stress Test: Impact of UK Housing Market
Downturn Scenarios on UK Non-Conforming RMBS Ratings" is the
first in a series of stress test reports that will be published in
the coming weeks looking at different European structured finance
jurisdictions and asset classes.