|
Special Reports
Home Equity Lending
Rating Agencies Changed Views on Some HE Loans
Piggybacks' rating criteria have changed.
By Bonnie Sinnock
Relatively less favorable property values, legal/regulatory developments, and
an increase in repurchases and early payment defaults that reflect poorer loan performance - particularly in home
equity product areas - have added to originators' challenges of late, said Mary Kelsch, senior director in Fitch
Ratings' operational risk group.
The shift in housing values - clearly a key factor in home equity originations
- has been characterized as a slowdown in appreciation by some and a decline by others, according to Celia Chen,
director of housing economics at Moody's Investors Service's Economy.com. "Housing data tends to be quite
volatile," she told attendees at a Moody's conference early last month. Like many in the market, she said
that while overall HPA is slowing if not declining, there are wide regional differences. The East and West Coasts
are particularly vulnerable, for example, Ms. Chen noted.
Meanwhile, in the subprime sector, the 2006 vintage has been "distinguishing
itself as one of the worst performers," Dominion Bond Rating Services said in a recent report.
Ms. Kelsch of Fitch, whose originator reviews have a bearing on costs for those
that securitize, said Fitch keeps a close eye on all parties involved in originations and has been careful to continue
doing so as home price and performance concerns in the home-equity-related subprime, second-lien and alternative
A credit areas have ramped up. Although ultimate responsibility resides with issuers and third parties' participation
is generally viewed with neutrality, it is taken into account. A review may note, for example, a broker that has
sourced a particularly sizable number of loans in a pool or underwriting that is partially delegated in a correspondent
relationship. In the case of stated-income loan originations, reviews also examine whether income is being overstated,
said Margaret Sweeney, a director at Fitch.
When it comes to second-lien loans, those that "piggyback" on first
liens have come to be viewed this year by some rating agencies as a more negative influence on loan performance
than previously thought, a move that has had implications for home-equity originators that securitize.
Since Nov. 6, when it began using its new ResiLogic model as the basis for its
ratings of securitized residential originations, Fitch has changed its criteria for loans in which a second lien
is used to finance the borrower's downpayment. ResiLogic's release potentially makes Fitch's opinions more influential
than in the past as it marks the first time the RMBS model software has been available for licensing by market
participants.
Previously, the rating agency applied a "frequency of foreclosure" odds
penalty to higher combined loan-to-value ratio deals only when piggybacks represented more than 35% of the loan
pool. Under the change, Fitch said it applies the penalty to the CLTV of both liens for every loan that has more
than one lien. This has raised credit enhancement level requirements for the product, which - in turn - has increased
the cost to securitize it.
The study of over 1.6 million residential first-lien and closed-end second mortgages'
performance that Fitch based its model on found that attributes that define loans often defined as home-equity
product, specifically credit scores/sectors and CLTVs, were at the top of a list of loan characteristics ranked
in order of their degree of influence on FOF. (Fitch found lower credit scores/sectors and higher CLTVs were correlated
with higher odds of default.)
Standard & Poor's earlier in the year also made rating changes that made it
more costly to issue securitized piggyback loans. A call to a spokesman for updated comment on the trends in the
home-equity sector had not been returned at press time.
Moody's at one of its conferences last month indicated that it does have plans
to update its approach to rating option adjustable-rate mortgages in response to loan product innovation. But a
call to a spokeswoman to clarify to whether there are other changes planned that might have implications for home-equity
product had not been returned at press time.
HIGH RISK* METRO AREAS
Worcester, Mass.
Providence, R.I.
Nassau, N.Y.
Edison, N.J.
Washington, D.C.
Miami, Fla.
New Orleans, La.
Honolulu, Hawaii
San Diego
Los Angeles
Santa Ana
Riverside
Bakersfield
Fresno
Stockton
Sacramento *Has a greater than 50% probability of seeing a home price decline.
Source: Moody's Economy.com
|
