March 17 (The following statement was released by the rating agency)
Fitch Ratings has finalized its criteria for analyzing loans securing U.S. RMBS under the
qualified mortgage (QM) standards and Ability-to-Repay rule (the Rule) recently adopted by the
Bureau of Consumer Financial Protection (CFPB).
Fitch has developed assumptions regarding the probability of challenges to the
Rule (and/or QM status) as well as the potential costs or damages. The
assumptions reflect a low probability/high severity scenario. 'We expect some
defaulted borrowers will likely challenge the Rule, but a lack of legal
precedent could make the first few cases high profile and prone to significant
legal costs,' said Senior Director Suzanne Mistretta.
Fitch will make upward adjustments to its credit enhancement calculations if the
originator designates the loan as higher priced QM (HPQM) or non-QM. Loans
identified by the lender and confirmed by third party due diligence as safe
harbor QM (SHQM) will not receive an adjustment.
Fitch assumes that the maximum number of borrower challenges for HPQMs and non
QM loans is the pool's lifetime probability of default (PD) derived from Fitch's
mortgage loan loss model. This population is narrowed further to reflect only
those borrowers likely to default within five years of origination. The
likelihood of challenge is also driven by whether the foreclosure process is
judicial or non-judicial based on the state in which the property is located.
The PD assumption is the starting point for challenges to the Rule. As such,
'lower credit quality pools will see a larger effect on credit enhancement
relative to higher credit quality pools primarily due to their higher
probability of default and smaller loan balances,' said Mistretta.
Fitch will differentiate between structures that provide for expenses to be paid
from available funds and those that deduct expenses from the mortgage pool's net
weighted average coupon (Net WAC). Where trust expenses are paid from available
funds, additional subordination will be expected. Where expenses are absorbed by
the pool's Net WAC and the note rate is capped at the Net WAC, Fitch will not
adjust its loss expectation for the pool. Although expenses are borne by both
senior and subordinated investors, this provision does not affect the trust's
ability to pay contractual amounts due.
The loan designation and determination of potential challenges and legal costs
and damages will be highly dependent on the results of Fitch's review of the
originator's/aggregator's underwriting guidelines and origination processes. The
Rule applies to all mortgages for which loan applications were received on or
after Jan. 10, 2014. The Rule requires lenders to make a reasonable
determination of a borrower's ability to repay the loan at the time of
consummation. In addition, depending on the loan product, features and pricing,
the Rule affords creditors (and their assignees) varying degrees of protection
against borrower disputes in the form of a safe harbor or rebuttable presumption
of compliance with the Rule.
The finalization of the criteria follows the conclusion of Fitch's request for
comment made in Fitch's Nov. 12, 2013 special report 'U.S. RMBS:
Ability-to-Repay and Qualified Mortgage Rule Approaches" . The criteria is
detailed in the report published today, available at the below link, and should
be read in conjunction with Fitch's "U.S. RMBS Loan Loss Model Criteria" and
"U.S. RMBS Originator Review and Third-Party Due Diligence Criteria."
Link to Fitch Ratings' Report: U.S. RMBS Qualified and Non-Qualified Mortgage