OREANDA-NEWS. Fitch Ratings has affirmed 54 tranches of the Newgate Funding plc (NF) RMBS series. A full list of rating actions is available at www.fitchratings.com or by clicking on the link above.

The NF series is a securitisation of UK non-conforming residential mortgages originated by Mortgages plc, a subsidiary of Bank of America Merrill Lynch. The six transactions have similar portfolio characteristics with high portions of self-certified borrowers, ranging between 54% and 75% of the outstanding portfolio, and interest-only loans representing 60% to 82% of the respective pools.

KEY RATING DRIVERS
High Arrears
Arrears levels have remained high across the series. The three-months plus arrears remained around 20% of the outstanding balance in all transactions except NF 2007-3, which has reported levels more in line with Fitch's non-conforming index (currently at 11%). Despite this, current credit enhancement (CE) is sufficient to withstand the stresses associated with current ratings, leading to today's affirmations.

In contrast to the majority of Fitch-rates UK non-conforming transactions, there has not been a notable downward trend in arrears across the series . Fitch believes the continuing high arrears levels are driven by a significant number of delinquent borrowers currently making no payments and the limited number of properties being taken into possession. In particular, recent collection rates show that at least one in three borrowers in arrears by more than three months are currently making no payment, which suggests a low propensity for borrowers to clear arrears. Although loans in possession remain low at below 1% of the outstanding portfolio balance, the current high pipeline of late-stage arrears may translate into possessions and associated losses in the near future.

The existing large pipeline of late-stage arrears will likely put a considerable strain on excess spread when the pace of possessions eventually increases, particularly given the fairly high loss severities (averaging 30%) observed to date. Additionally, arrears and the proportion of borrowers unable to make any payments could increase if interest rates rise modestly. In Fitch's view, the junior tranches are more dependent on the availability of excess spread and thus more vulnerable to these high levels of arrears and associated losses.

Unhedged Basis Risk Impact
There are no hedging agreements in place in any of the transactions to mitigate the basis risk arising from the Libor-linked notes and underlying mortgages linked to standard variable rates or the Bank of England base rates. Consequently, in its analysis, Fitch has applied haircuts to the coupons received to reduce the credit given to the excess spread generated by the structures. While the reduction in revenue has not affected the senior notes, it has further contributed towards potential stresses on the junior tranches.

RATING SENSITIVITIES
Fitch believes that an unexpected increase in interest rates will put a strain on borrower affordability, particularly given the weaker profile of the underlying borrowers in the NF portfolios, as evidenced by the fairly high level of arrears despite prevailing low interest rates. If defaults and associated losses exceed the agency's stresses, the junior tranches could be further downgraded.

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.

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.