Fitch Announces Criteria for Analyzing Non-Performing Loan RMBS
Fitch's approach to analyzing NPL RMBS leverages its U. S. RMBS Seasoned and Re-performing Loan Criteria with respect to loan file documentation, due diligence review scope and sample size, and representations and warranties. However, due to the idiosyncratic and adverse-selection risk, Fitch applies a rating cap of 'Asf' to NPL RMBS and expects a number of structural features, such as a sequential pay structure and application of available funds to pay interest to the rated notes.
Fitch assumes a 100% probability of default for NPL loans and loss severity is determined based on the loan's current property value, Fitch's model-projected sustainable market value decline, property liquidation assumptions, and a distressed sale discount.
A key distinction between Fitch's NPL rating approach and that used for re-performing loans is its cash flow analysis. For NPLs, Fitch applies a transition rate approach where the transition rates from one DQ status to another are decreased for a period of time to delay liquidation timing for stress scenario analysis.
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