(Repeat for Additional Subscribers)
May 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has finalized its new model framework for estimating losses on prime Canadian residential mortgage pools. This follows the conclusion of the consultation period for the exposure draft that Fitch published on March 4.
The final model is detailed in the report published today and available in the above link.
Fitch will review its existing portfolio of Canadian covered bonds under the new criteria and publish research disclosing updated expected losses on the cover pools by the end of June. Fitch does not expect any negative rating impact based on the implementation of the new model to existing covered bonds.
Fitch received feedback from a number of market participants during the consultation period. Most comments came from issuers who considered Fitch’s approach to be overly conservative. Fitch thoughtfully reviewed all feedback in its finalization of the criteria, the details of which have been included in a special companion piece also published today and available by clicking on the link at the end of the press release.
The model framework described in the final criteria is effectively unchanged from the version contemplated in the exposure draft.
Key drivers of the model include:
—Home price projections based on Fitch’s proprietary sustainable home price (SHP) model. Macroeconomic fundamentals including GDP, unemployment and mortgage rates, among others, drive the agency’s view of long-term sustainable value. Fitch currently estimates that home prices are overvalued by approximately 20% in real terms across Canada (with regional variations).
However, actual nominal declines could be as low as 10% due to the effects of inflation and price momentum;
—Sustainable loan-to-values (sLTVs) reflecting real changes in house prices since origination as well as Fitch’s projected market value declines based on the SHP model. Borrower equity, as expressed by sLTV, is the primary driver of default in Fitch’s model;
—Borrower and loan attributes. In addition to sLTV, borrower credit score, total debt service ratio, loan purpose, occupancy and property type drive Fitch’s default estimates;
—Accounting based approach to determine loss severity (LS). Fitch’s LS estimates take into account the cumulative effect of accrued interest as well as the legal costs, sales commissions, and other expenses associated with maintenance and upkeep of the property during the liquidation period on the proceeds available to investors;
—Two-step rating stress. House prices are first reduced to their sustainable value and then subjected to a further stress that corresponds to each rating category. The ‘AAA’ market value decline stress assumes that home prices decline below the sustainable value by 35%.
Fitch will apply the new model to analyze both new and existing ratings for covered bond programs as well as those supporting asset-backed commercial paper (ABCP) facilities and residential mortgage backed securities, if any.
Link to Fitch Ratings’ Report: Canadian Residential Mortgage Loan Loss Model