The overall performance rating of global structured finance remained a challenge in 2012 as downgrades predominantly outnumbered upgrades, according to Fitch Rating’s global structured finance rating report.
The U.S. residential mortgage-backed securities sector led the way and was responsible for 84% of downgrades in 2012 because of older vintage RMBS transactions.
Furthermore, the vast majority of downgrades were due to a combination of an extension of the RMBS loan loss model to subprime and Alt-A sectors as well as adverse selection remaining in prime pre-2005 pools.
“Historically low interest rates resulted in high refinancing activity of eligible borrowers, leaving the pools increasingly concentrated with borrowers unable to refinance. Consequently, prime pre-2005 pools continued to show poor performance throughout 2012, whereas the collateral performance of other sectors and vintages stabilized,” according to the credit rating agency.
Across the entire RMBS sector, downgrades rose 8%, but the pool of outstanding rates contracted 20% last year, contributing to a substantially higher downgrade rate compared to 2011.
“The uptick in downgrades was due to a combination of the factors noted above — model changes, adverse selection in older mortgage pools, and the sovereign crisis in Europe,” the report explained.
Upgrades remained relatively unchanged at 2%, with the RMBS sector accounting for 17% of the total.
Additionally, the percentage of bonds that were paid in full in 2012 was relatively flat compared to the previous year’s percentage of 10%, Fitch said.
However, RMBS was the only sector that obtained a relatively high number of withdrawals in 2011, which is attributed to “the discontinuation of ratings for bonds that had reached a smaller loan count.”
The number of RMBS impairments also declined by more than half, but the sector accounted for the majority of overall impairments last year, representing 64.3%, Fitch explained.
