OREANDA-NEWS. Fitch Ratings says it has seen an increase in both the enquiry level and issuance volume of RMBS transactions backed by revolving portfolios of mortgages. RMBS structures with revolving periods appeal to both issuers and investors but are not without their risks.

Issuers benefit from revolving structures as they are able to lengthen the term of their funding and lock in pricing, while investors often appreciate the longer tenor of the investment and the mitigation of the reinvestment risk that usually accompanies pass through securities.

It is Fitch's view that revolving pools carry additional credit risks. The longer the revolving period, the greater the exposure an investor has to a material change in the credit quality of the underlying assets as well as to changes in the economic cycle. Additionally, during the revolving period, the notes typically do not build-up any additional credit enhancement (although in the event the structure has a scheduled amortisation feature - a trend seen in recent UK transactions - a limited increase in credit enhancement can be expected). The notes may also suffer from adverse selection as the best quality loans pay off and may not be replaced with loans of the same high quality.

Where Fitch rates such transactions its analysis accounts for these additional risks. For structures with revolving periods, Fitch expects structural features to limit the migration of the portfolio credit quality over time via strict eligibility criteria. Where structural features are insufficient, Fitch may assume the portfolio migrates to a worse portfolio mix (than what it would assume otherwise) or may choose to cap the maximum achievable rating.

Fitch expects the ability of the transaction to purchase new mortgages to be subject to performance triggers and be further subject to eligibility criteria to ensure pool quality remains consistent. Collateral eligibility criteria typically include those related to loan-to-value, debt-to-income and limits based on relevant loan or property characteristics.