Fitch Ratings affirmed six classes of home equity conversion mortgages (HECMs) and downgraded one from stable to negative, in a recent report.
Three of the affirmed HECMS are from 2006, and the other three from 2007. The downgraded HECM is from 2007.
The rating committee considered the limited amount of available data for the loan-level performance of reverse mortgages when determining credit ratings for the bonds, in addition to the relationship between the expected losses and credit enhancement.
“Due to the stress experienced in the housing market over the past several years, an increased number of HECM loans are maturing in a negative equity position resulting in an increased number of foreclosures,” Fitch says in the report. “The weak housing market has also resulted in an increased number of foreclosures ultimately becoming real-estate owned (REO) and taking longer than six months to liquidate. Historically, roughly 25% of non-agency loans which entered foreclosure ultimately liquidated after more than six months in REO.”
Fitch also assumed in the rating-stress scenarios an increasingly higher-than-expected percentage of foreclosure loans would liquidate from REO in over six months. Fitch assumed 25% of initiated foreclosed loans in the base-case and 60% of initiated foreclosure loans in the ‘AAAsf’ scenario would both become REO and liquidate from REO in over six months.
The full ratings report can be accessed here.
Written by Cassandra Dowell