No go loan zone: Fitch toughens global RMBS ratings criteria

Naughty insurers aren't paying out full claims on defaults, and Fitch isn't happy.

Fitch ratings released an exposure draft stating the suggested criteria for analyzing the credit provided to lenders’ mortgage insurance within residential mortgage-backed security transactions.

The proposed new criteria will use the lender’s ability to pay or Insurer Financial Strength (IFS) rating and willingness to pay or Quality Adjustment (QA) as bases for issuing credits. According to Fitch’s press release, "[t]he QA addresses the potential risk arising from the level of formal coverage and the resulting actual coverage, which may be impacted by policy exclusions, denied and reduced claims and rescissions. Fitch's proposed criteria will give credit to LMI through an adjustment to loss severity on a loan by loan basis.”

"Even in relatively benign economic environments LMI does not cover all losses accruing to insured loans, irrespective of the insurer's capacity to pay. Fitch's QA is designed to take this into account. Recent data from around the globe shows that, while outright denial is rare, claim adjustments from insurers are common," said David Carroll, Director in Fitch's Australian Structured Finance team.

"Australian and New Zealand RMBS transactions will be impacted by this proposed criteria in terms of higher credit enhancement due to the QA and all notes will require credit enhancement in excess of LMI for Fitch to continue to provide a rating. RMBS transactions in the US and Europe are not expected to be impacted by this criteria due to their limited use of LMI," said Natasha Vojvodic, Head of Australian and New Zealand Structured Finance.

The consultation period will last for one month and market participants are encouraged to comment on the proposed criteria. These comments will be considered in making the final report.