Fitch Takes Negative Actions on Private Label Reverse Mortgage Securities

Fitch Ratings announced it downgraded nine and withdrew three ratings on 17 classes in five Structured Asset Securities Corporation (SASCO) Reverse Mortgage Transactions.

The negative rating actions affected classes issued since 2005 and were driven mainly by home price declines and a revision to projected home price decline assumptions.

“Fitch estimates that over 40% of the borrowers in the 2006 and 2007 transactions currently owe more on their mortgage than their home is worth,” said the company in a statement. “Furthermore, Fitch expects in the base-case an additional 13% home price decline on the 2006-2007 properties on average before home prices stabilize. Approximately 60% of the loans from those vintages are located in California.”


In the investment-grade rating-stress scenario analysis, Fitch assumed home price declines below a sustainable level of 20% to 35% for the ‘BBBsf’ through ‘AAAsf’ stresses, respectively. Fitch also made assumptions about the costs incurred through a maturity event, including accrued interest, sales commissions and other related expenses.

For recent vintage transactions with downgraded classes, Fitch estimated average loss severities on matured loans of approximately 50% in the ‘BBBsf’ stress scenario and close to 80% in the ‘AAAsf’ stress scenario.

The underlying loans behind the securities are private-label securities issued by Lehman Brothers, Fitch wrote in an email to RMD.

Being issued by Lehman Brothers, it’s likely the loans are cash account loans from Financial Freedom, which exited the business earlier this year.

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  • This should come as no surprise.  Even though the PLFs were low, the interest rates were very high.  At 7.5% interest and using the rule of 72, the balance due on a negatively amortized mortgage doubles in less than 10 years.  Then looking at the values of properties in California in particular, home values have dropped significantly even in higher value homes.

    But of course the foregoing assumes borrowers took out almost all of the available proceeds at or near loan closing. 

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