OREANDA-NEWS. Fitch Ratings has affirmed Mortgages no. 6 Plc (M6) and Mortgages no.7 Plc (M7), two UK non-conforming RMBS transactions backed by mortgages originated by Mortgages Plc. The ratings on all notes rated below 'AAAsf' were removed from Rating Watch Positive (RWP).

A full list of rating actions follows at the end of this commentary.

KEY RATING DRIVERS

Stabilising Asset Performance
In the 12 months leading up to October 2015, late stage arrears (loans with more than three monthly payments overdue, expressed as a percentage of the outstanding portfolio balance) fell by 2.4 percentage points (pp) to 17.2% in M6 and by 2.6pp to 17.8% in M7. These levels are well above Fitch's UK non-conforming RMBS Index, which in October 2015 stood at 9.7%. Over the same period, cumulative possessions remained broadly stable in M6 (8.6% of the original portfolio balance, +9bps yoy) and increased slightly in M7 (10.8%, +21bps yoy).

Despite late-stage arrears are being well above the market average, their substantial decrease, together with stabilising possession levels has led Fitch to assign Stable Outlooks to the notes.

Stressed Quick Sale Adjustment (QSA) Assumptions
Fitch relied on loan-by-loan information received on property sales for the M6 and M7 portfolios. The agency identified higher than average QSA levels, which were included in the estimation of recovery rates and expected losses considered in the credit enhancement analysis.

Un-hedged Interest Rate Risk
Loans indexed to Mortgages Plc's standard variable rate (SVR) account for 83.8% and 85.8% of the total portfolios in M6 and M7, respectively. The current SVR paid by the borrowers, 2.65%, is within Fitch's SVR long-term expectations (Libor + 2% to 3%) and therefore no adjustment has been applied to it in the analysis. The remaining loans in the portfolios are linked to the Bank of England base rate (BBR). As per its criteria, Fitch applied a haircut on the BBR loans' spreads of 100bps to 200bps for the first year (depending on the rating level) and a lower haircut of 50bps thereafter. As reflected in the rating affirmations, the current credit enhancement is sufficient to absorb such stresses.

Payment Interruption Risk Mitigated
Fitch tested the ability of the structures to cope with the loss of the servicer. The cash provided by the non-amortising liquidity facilities and reserve funds, totalling 64.2% (M6) and 33% (M7) of the current notes' balance, is sufficient to cover the risk of an interruption in payments of senior fees and notes' interests, under stressed Libor assumptions, for more than two payment dates.

RATING SENSITIVITIES
A sharp increase in interest rates would put a strain on borrower's affordability, particularly given the weaker profile of non-conforming borrowers. Defaults and associated losses in excess of the agency's stresses may lead to negative rating actions on the notes.

As these portfolios have shrunk to 10% (M6) and 17% (M7) of their original balances, they may experience natural adverse selection as the better quality loans are being repaid. Under these circumstances, deterioration in the asset performance beyond Fitch's expectations could lead to negative rating actions.

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 asset 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 asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transactions' initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Prior to the transactions closing, Fitch conducted a review of a small targeted sample of Mortgages Plc'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 portfolio.

Overall, 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 U.S. Bank as at 30 October 2015
-Transaction reporting provided by U.S. Bank as at 30 October and 2 November 2015

Fitch has affirmed the following ratings:

Mortgages No. 6 plc:
-Class A2 (ISIN XS0206259888): affirmed at 'AAAsf'; Outlook Stable
-Class B (ISIN XS0206260464): affirmed at 'AA+sf' off RWP; Outlook Stable
-Class C (ISIN XS0206260894): affirmed at 'A+sf' off RWP; Outlook Stable
-Class D (ISIN XS0206261603): affirmed at 'BBB+sf' off RWP; Outlook Stable
-Class E (ISIN XS0206261942): affirmed at 'BB+sf' off RWP; Outlook Stable

Mortgages No. 7 plc:
-Class A2 (ISIN XS0225922110): affirmed at 'AAAsf'; Outlook Stable
-Class B (ISIN XS0225922383): affirmed at 'AA+sf' off RWP; Outlook Stable
-Class C (ISIN XS0225922466): affirmed at 'Asf' off RWP; Outlook Stable
-Class D (ISIN XS0225922623): affirmed at 'BBBsf' off RWP; Outlook Stable
-Class E (ISIN XS0225922896): affirmed at 'Bsf' off RWP; Outlook Stable.