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June 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Precise Mortgage Funding 2014-1 plc’s notes expected ratings, as follows:
Class A: ‘AAA(EXP)sf’, Outlook Stable
Class B: ‘AA(EXP)sf’, Outlook Stable
Class C: ‘A(EXP)sf’, Outlook Stable
Class D: ‘BBB(EXP)sf’, Outlook Stable
Class Z: not rated
The final ratings are subject to the receipt of final documents conforming to information already received.
Credit enhancement for the class A notes at 15.0% will be provided by the subordination of the class B to class Z notes.
The transaction is an RMBS securitisation of near-prime residential mortgages that were originated by Charter Court Financial Services (CCFS), trading as Precise Mortgages (Precise or the originator) in the UK (excluding Northern Ireland). The loans are serviced by Charter Court Financial Services Limited (Exact).
Post-Crisis, Near-Prime Mortgages
The loans in the portfolio are post-crisis originations that have been underwritten using near-prime criteria. Borrowers can be accepted with minor levels of prior adverse credit history, but the levels of prior adverse in the pool are small in comparison with the levels seen during the peak of the cycle in 2006/2007.
Limited Performance History, Stringent Underwriting
Precise began originating loans in 2010 and as such can only provide fairly limited loan performance data. The data covers 44 months, but there is only 12 months of history where the sample is greater than 1,000 loans. However, Fitch believes that this is adequately offset by the stringent underwriting criteria and controls in place. Given this, and that the non-prime default matrix was used, the agency applied a minor 10% downward adjustment to the base default probabilities.
Unrated Orignator and Seller
The originator and seller are not rated entities and may have limited resources available to repurchase any mortgages in the event of a breach of representations and warranties (RW) given to the issuer. Whilst Fitch considers this a weakness, there are a number of mitigating factors that make the likelihood of a RW breach remote.
Hedged Fixed/Floating Risk
As at 20 June 2014 the portfolio was around 61.5% fixed rate loans, with the rated notes paying three-month Libor plus a margin. A balance-guaranteed swap is in place, where the issuer pays fixed and receives three-month GBP Libor.
Combined Liquidity, General Reserve
The transaction is supported by a non-amortising rated note reserve fund set at 3.0% of the rated note balances at closing. The reserve fund is initially isolated to provide only liquidity support at the point of closing, covering primarily class A liquidity shortfalls and liquidity shortfalls to the other rated notes. As the senior notes amortise, the liquidity portions reduce and the remainder becomes available to absorb credit losses. As the reserve fund is not available to absorb credit losses at the time of closing, the agency has not included it in credit enhancement calculations.
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch’s base case expectations, which in turn may result in potential negative rating actions on the notes. Fitch’s analysis revealed that a 30% increase in the weighted average (WA) foreclosure frequency, along with a 30% decrease in the WA recovery rate, would result in a model-implied downgrade of the class A notes to ‘Asf’ from ‘AAAsf’ and a model-implied downgrade of the class B notes to ‘BBB+sf’ from ‘AAsf’.
More detailed model implied ratings sensitivity can be found in the presale report which is available at www.fitchratings.com.
Precise provided Fitch with a loan-by-loan data template. All relevant fields were provided in the data tape, with the exception of prior mortgage arrears, where Precise was unable to differentiate between loans having had one to six months of prior arrears and those having had seven to 12 months prior arrears. Performance data on historical static arrears was provided for all loans originated by Precise, but the scope of the data was limited by the small origination volumes (around GBP725m of owner-occupied, buy-to-let and short-term mortgage loans) and the length of available history (the first Precise origination was in early 2010).
Due to Precise’s limited origination history of Precise, it was only able to provide loan-level data for a single sold repossession. However, Precise provided a data tape in Fitch’s template for 217 sold repossessions that have been serviced by Exact, which included the Precise originated loans. Although the majority of the sample was not for loans originated by Precise, the agency considers the performance of the servicer to be one of the key components in determining sold possession performance. Given this, the agency assumed an average quick sale adjustment of 23%, which although conservative, did give some credit for the performance of the servicer in selling possessed properties. The market value decline assumptions were adjusted to reflect these assumptions.
On a site visit to Precise’s offices Fitch conducted a file review to check the quality of Precise’ originations on a larger number of loans that would be reviewed during a review of an established prime lender.
Fitch has also reviewed the results of an agreed-upon procedures (AUP) report conducted on the portfolio, which checked the accuracy of the data file provided to Fitch for its rating analysis. The AUP report showed there were no material errors in the data sample that had been tested.
It is Fitch’s opinion that the data available for the rating analysis was of sufficient quality.
To analyse the CE levels, Fitch evaluated the collateral using its default model ResiEMEA. The agency assessed the transaction cash flows using default and loss severity assumptions under various structural stresses including prepayment speeds and interest rate scenarios. The cash flow tests showed that each class of notes could withstand loan losses at a level corresponding to the related stress scenario without incurring any principal loss or interest shortfall and can retire principal by the legal final maturity.
A comparison of the transaction’s Representations, Warranties & Enforcement Mechanisms to those typical for that asset class is available by accessing the appendix that accompanies the presale report (see “Precise Mortgage Funding 2014-1 Plc - Appendix”, at www.fitchratings.com).
Link to Fitch Ratings’ Report: Precise Mortgage Funding No. 2014-1 plc