Fitch Ratings plans to look more closely at the representations and warranties, documentation and performance history of re-performing loan pools and some seasoned performing pools from secondary market sources.
Under a proposal released Aug. 11, the ratings agency would use an alternative approach if the loan pools in these categories have limited representation and warranty frameworks, weak rep providers, incomplete collateral files or missing documentation, as weakness in these areas can impede foreclosures and property liquidations.
Re-performing loans are loans that at one point were delinquent or in default, but have since returned to performing status such that the borrower is consistently making payments again, sometimes with the help of a loan modification or other workout plan.
Re-performing residential mortgage-backed securities aged over 24 months and have strong performance histories could obtain investment grade ratings under the new criteria if the reps and warrants, documentation, due diligence reviews and transaction structures are strong enough.
But Fitch warns that if it finds those last four aspects of deals are lacking, it may limit the maximum rating or decline to rate deals.
Fitch typically reviews 35 reps designed for rating new origination and seasoned performing portfolio collateral. So in cases where transactions lack all 35 reps, or have a rep provider with a below-investment grade rating, Fitch plans to make due diligence and document file reviews critical to its analysis of lien enforceability and servicers’ ability to foreclose.
Fitch also proposes to examine other factors beyond what it currently uses for newly originated loans in estimating losses. These include consideration of updated valuation types, borrower pay history and modified payment amounts.
Fitch is accepting comments on its proposal through Sept. 15.