Fitch Affirms Hypenn Series at 'AAAsf'/Stable
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Asset Performance Within Expectations
As of end-July 2016, loans with more than three monthly payments overdue (late arrears) stood at 13bps of the current portfolio balance in Hypenn I, versus the Dutch market average of 42bps. Hypenn II's late arrears were reported at 22bps (-21bps year-on-year), while late-stage arrears across the remaining three transactions remain negligible. This is to be expected as the three more recent deals were issued between April 2015 and April 2016 and have limited performance history. The limited arrears pipeline is reflected in the Stable Outlooks.
The reported cumulative balance of foreclosed mortgages remains limited in Hypenn I at less than 0.1% of the original portfolio. No foreclosures have been reported in Hypenn II to V since the transactions closed.
Historical data on the NNB mortgage book showed relatively weaker performance compared to peers, despite the sound performance of recent vintages. Accordingly, in its analysis of the portfolios Fitch applied a lender adjustment, leading to a 10% increase in base foreclosure frequency.
NHG-Neutral Performance
NHG loans represent between 23.9% (Hypenn I) and 100% (Hypenn II and V) of the securitised portfolios. Based on historical data provided to Fitch, there is no notable difference in the performance of NHG and non-NHG loans. Hence, in its analysis Fitch did not apply a reduction to the base foreclosure frequency on these products.
Fitch also used historical claim data received from Waarborgfonds Eigen Wonigen (WEW; AAA/Stable/F1+) to determine its compliance ratio assumptions, which are between 75% and 80% depending on the distribution of loan origination years across the portfolios.
Hypenn I in Revolving Period
Principal proceeds will not be used to redeem Hypenn I notes until November 2018. The issuer will instead use principal collections towards the purchase of new mortgage receivables. Fitch analysed the potential shift in the asset pool's characteristics to the worst possible portfolio composition at the end of the revolving period. The analysis shows that the credit enhancement available to the class A notes (10.1%) is sufficient to withstand this stress.
Commingling and Payment Interruption Risk Treatment
Borrowers' payments are due on the last day of each month. Since there is no replacement trigger associated with the seller collection account holder (NN Insurance Eurasia), the risk that monthly collections could be commingled with the bank's insolvency estate following its default in Fitch's view is material. The agency considered this risk by assuming a loss equal to one month of scheduled and unscheduled principal and interest collections. The analysis showed that for most of the transactions in the series, the available credit enhancement is sufficient to withstand this loss. In the case of Hypenn IV, cash flow analysis showed that there would be reliance on excess spread to cover for the loss caused by funds being commingled.
The structures of the Hypenn deals include non-amortising cash reserves, which can be used towards the payment of senior fees, interest and principal on eligible notes. Hypenn III, IV and V's reserves are below target and will continue to be funded by excess spread up to their target levels. At present they stand at 69.3%, 35.4% and 12.6% of their respective target amounts.
The transactions also feature cash advance facilities, which are provided by Bank Nederlandse Gemeenten (BNG; AA+/Stable/F1+) and are solely dedicated to cover senior fees and interest shortfalls. Should the servicer default, the cash provided by the reserve funds and liquidity facilities is, in Fitch's view, sufficient to allow for payments of fees and notes' interest under stressed Euribor assumptions for more than two payment dates in all deals bar Hypenn II, where the coverage would be just under six months.
Fitch notes that the operational review conducted on 9 March 2016 did not highlight particular concerns regarding the servicing practices.
Limited Impact of Other Claims
Other claims are other liabilities which are secured by the mortgage rights (overdraft, consumer loan, credit card debt). The issuer is entitled to a pro-rata share of the proceeds in the event of foreclosure. The seller has a contractual obligation to the issuer to ensure that any foreclosure proceeds go first to the issuer, however this pledge will not hold if a potential seller bankruptcy precedes the notification event.
The seller is committed to either posting collateral if the amount of other claims exceeds 0.50% of the pool balance or to repurchase loans to reduce the level of other claims to below the threshold. Fitch's recovery rate assumptions accounted for this mitigant.
Insurance Set-off Risk
The intention of insurance policies is that the proceeds of the investments can be used to repay the mortgage loan in full or in part at maturity. In the event that the policy providers are no longer able to meet their obligations, for example as a result of insolvency, borrowers may seek to set-off the claim over the insurance provider against their mortgages, on the basis that the intention is for the loan to be repaid using the proceeds from the policy.
The risk that this set-off could be successfully exercised depends on whether the lender and insurance policy provider are the same legal entity, or whether the mortgage and insurance policies are offered as one product. If they are, Fitch assumes a set-off probability equal to 100%. This figure is reduced to 25% if the insurance provider and lender are different institutions or if the mortgage and insurance policy are not a joint product.
Currently, mortgage loans that have an insurance policy attached represent between 6.1% (Hypenn I) and 8.7% (Hypenn IV) of the total portfolios, excluding Hypenn II, which does not feature any insurance loans. The derived set-off exposure is accounted for in the analysis of the available credit enhancement.
Sufficient Credit Enhancement
Fitch believes that the credit enhancement, ranging from 6.1% (Hypenn V) to 10.1% (Hypenn I), is sufficient to withstand all the stresses applied during the analysis, as reflected in the affirmation.
Interest-Only Concentration for Hypenn I and II
The transactions have material concentration of interest-only loans maturing within a three-year period during the lifetime of the transaction. For Hypenn II, Fitch carried out a sensitivity analysis assuming a 50% default probability for these loans. No rating action was deemed necessary as a result of the interest-only loan maturity concentration.
In Hypenn I, perpetual interest-only loans represent 31.4% of the portfolio. Since these loans do not have a contractual term, Fitch tested different maturity distributions. The agency assumed that the 'maturity date' of the perpetual loan or its default coincide with the death of a borrower aged 100. Given that the borrowers' age at loan origination is not subject to same extent of concentration, the maturity profile of perpetual loans is relatively dispersed.
An alternative scenario that Fitch has tested assumes that borrowers will start repaying their perpetual loans once the 30-year tax deductibility window elapses. The agency also found that in this scenario there is no maturity concentration.
Variation from Criteria
In its analysis of the portfolios, Fitch applied a 20% increase to the base foreclosure frequency for borrowers on temporary contracts. In addition, the agency applied a 20% increase to the base foreclosure frequency for credit mortgages. These adjustments to foreclosure frequency calculations constitute a variation from the current Criteria Addendum: Netherlands - Residential Mortgage Assumptions.
Data Adjustments
Fitch notes that a proportion of loans across the series (12.9% in Hypenn I, 0.12% in Hypenn II and 1 loan in Hypenn III) were identified as having been subject to an AVM property valuation. Fitch understands that, according to NNB's policies, the property valuation type can only be Full, WOZ or construction costs. As such, Fitch did not apply any adjustment in relation to these mortgage features; hence there is no impact on the rating analysis.
In Hypenn I no data on borrower income was made available for two loans and as such they were automatically allocated to the highest debt-to-income class. In addition, Fitch removed a single loan from the analysis of Hypenn I, due to lack of sufficient data required to analyse it.
According to the investor reports, borrowers on temporary contracts make up between 5.8% (Hypenn I) and 14.6% of the pool (Hypenn II), while credit mortgages account for 0.9% of the current Hypenn I portfolio. These loans were not flagged in the loan level data available to Fitch. As a result, these loans were accounted for in Fitch's analysis through the lender adjustment.
RATING SENSITIVITIES
Unhedged Interest Rate Risk in Hypenn I
The pool consists almost exclusively of fixed rate loans and the interest payable on the notes is also fixed. Although the originator is committed to maintaining the weighted average portfolio interest rate above 4.25%, Fitch tested a scenario in which this commitment is no longer fulfilled. In this case, borrowers would re-negotiate to lower fixed or floating rates and the weighted average portfolio interest would reduce. The result of the analysis shows that the notes' ratings are insensitive to the rate compression.
All Deals
Deterioration in asset performance may result from macroeconomic factors. A corresponding increase in new foreclosures and the associated pressure on excess spread, reserve fund and liquidity facility beyond Fitch's assumptions could result in negative rating actions.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that affected the rating analysis.
Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Prior to the transactions' closing, Fitch reviewed the results of a third party assessment conducted on the asset portfolio information, which indicated errors or missing data related to borrowers' income and property valuation information. These findings were considered in this analysis by assuming:
- 15% haircut to the property market value of every 10th loan in the pool in Hypenn I, Hypenn III and Hypenn IV
- 8.5% haircut to the property market value of every 33rd loan in the pool in Hypenn V
- 10% haircut to the borrowers' income in Hypenn I and Hypenn III
- 10% haircut to the borrowers' income every 30th borrower in Hypenn II
- 20% haircut to the borrowers' income every 20th borrower in Hypenn IV
Prior to the transactions' closing, Fitch conducted a review of a small targeted sample of NNB's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolios.
Overall and together with the assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
- Loan-by-loan data provided by NNB as at 31 July 2016 (Hypenn I-II-III) and 30 June 2016 (Hypenn IV-V)
- Transaction reporting provided by NNB as at 17 July 2016 (Hypenn I), 17 August 2016 (Hypenn II), 17 June 2016 (Hypenn III), 18 July 2016 (Hypenn IV-V)
MODELS
The models below were used in the analysis. Click on the link for a description of the model.
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