fitchratings.com | January 25, 2017
A new non-prime mortgage market is beginning to emerge in the U.S., almost 10 years after the subprime and Alt-A mortgage markets shut down amid dramatic underperformance. Fitch Ratings expects a notable increase in newly originated non-prime RMBS activity in 2017, though on a significantly smaller scale and with a higher credit quality than pre-crisis origination volume.
The recently published report The Return of Non-Prime RMBS provides an introduction to the developing sector and a summary of pre-crisis risks that have been addressed, those that remain, and new risks that have emerged since the crisis. The report includes volume trends, early performance trends and a quick overview of early market participants.
The sector has seen a number of key improvements since the crisis, including legislative and regulatory changes that establish meaningful new standards and increase liability for lenders that make poor quality loans. Lenders have responded with operational enhancements that improve manufacturing quality, which is confirmed with third-party due diligence.
Several new risks have been introduced in the reemerging sector, including a reliance on bank-statements for income documentation for a meaningful percentage of the borrowers and the lack of precedent on how courts will interpret new laws, such as the Ability-to-Repay rule.
Fitch has increased its loss projections and rating stress assumptions significantly from pre-crisis levels, but, even with additional credit enhancement, some new issuers may not be able to achieve a ‘AAAsf’ rating until a longer track record is established.
Nancy Duffy McCarron, CBN 164780
Attorney, Real Estate Broker, BBB Arbitrator, CA Notary Public
Certified Forensic Loan Auditor, Property Manager
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