OREANDA-NEWS. June 30, 2015. Fitch Ratings has affirmed six tranches of the Emerald Series of Australian reverse mortgages. The transactions are securitisations of Australian reverse mortgage receivables originated by Bluestone Equity Release Pty Limited (Bluestone). The rating actions are listed at the end of this commentary.

KEY RATING DRIVERS
The affirmations reflect Fitch's view that current credit enhancement levels adequately support the notes' ratings, and that the performance of the portfolio with regard to borrower exit rates, property values and interest rates, remain in line with expectations.

Given the nature of reverse mortgage asset classes, these transactions have the unusual feature of an increasing liability balance. The increase is primarily driven by the capitalisation of interest, further advances and periodic instalments paid to the borrowers, which are funded by further advance and committed advance facilities, respectively. It should be noted that the issue balances reflect the amount payable to the note holders, as well as the committed advance facility and further advance facility provider.

Property prices: The affirmations reflect the relative strength of the Australian property market, which has not seen the significant devaluations experienced in other advanced economies around the world. Australian property prices have significantly increased since 2006/2007.

Borrower exit rates: The combination of exits, which have generally occurred at a faster rate than the original ratings' analysis anticipated, and the steady accumulation of excess spread has contributed to stronger levels of overcollateralisation.

Emerald I Reverse Mortgage 2006-1 Trust:
By the April 2015 payment date, the trust's reverse mortgage portfolio experienced 1038 borrower exits, amounting to AUD121.8m. Exits typically come in the form of borrower mortality, morbidity (move to long-term aged care), or voluntary prepayments. The majority of exits from the pool to date have been due to voluntary prepayments (716 exits), or loans repurchased by the Bluestone Equity Release Series 1 Warehouse Trust (72 exits). Mortality and morbidity account for 160 and 89 exits respectively. The weighted average borrower age was 78.8 years, compared with 70.3 years at issue. The weighted average (WA) loan to value ratio (LVR) on the pool has increased to 38.2%, from 35.1% at closing.

At the April 2015 payment date, the liability balance reached a total of AUD106.3m (excluding the accrued step-up margin) from an initial balance of AUD112.2m. There were no drawings on the liquidity facility.

Emerald II Reverse Mortgage 2007-1 Trust:
By the March 2015 payment date, the trust's reverse mortgage portfolio had experienced 865 borrower exits, totalling AUD110.3m. The majority of exits from the pool to date have been due to voluntary prepayments (674 exits), or loans repurchased by the Bluestone Equity Release Series 1 Warehouse Trust (7 exits), while mortality and morbidity account for 141 and 43 exits, respectively. The weighted average borrower age was 78.5 years, compared with 70.9 years at issue. The WA LVR on the pool has increased to 39.1%, from 32.4% at closing.

At March 2015, the liability balance had decreased to a total of AUD116.7m (excluding the accrued step-up margin), from an initial note balance of AUD124.2m. There were no drawings outstanding on the liquidity facility.

RATING SENSITIVITIES
Unanticipated significant falls in property prices or higher than expected longevity of the borrowers, could result in proceeds from the sale of the property being insufficient to cover the accrued balance outstanding. Fitch's analysis found that the two transactions are less vulnerable to downgrade, given that property values have increased significantly since the time these transactions were issued, providing a buffer for future property market corrections.

Australian property prices would need to decrease on average by 35-40% in order to bring the actual property value to the original valuation.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed 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 underlying pools and the transactions. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the underlying pools' information or conducted a review of loan origination files as part of its ongoing monitoring.

A comparison of the transactions' representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is also available by accessing the reports and/or links given under Related Research below.

Fitch has affirmed the following ratings:

Emerald I Reverse Mortgage 2006-1 Trust:
AUD77.7m Class A notes (ISIN AU300EMER013) affirmed at 'AAAsf'; Outlook Stable;
AUD13.1m Class B notes (ISIN AU300EMER021) affirmed at 'AAsf'; Outlook Stable; and
AUD15.8m Class C notes (ISIN AU300EMER039) affirmed at 'Asf'; Outlook Stable;

Emerald II Reverse Mortgage 2007-1 Trust:
AUD91.2m Class A notes (ISIN AU3FN0003307) affirmed at 'AAAsf'; Outlook Stable;
AUD13.5m Class B notes (ISIN AU3FN0003315) affirmed at 'AAsf'; Outlook Stable; and
AUD12.1m Class C notes (ISIN AU3FN0003323) affirmed at 'Asf'; Outlook Stable