In a special report published earlier in the year, the agency calculated the loss coverage for all vintages of UK prime pass-through RMBS across a variety of house price decline and mortgage default scenarios.
"The report identified that 'AAA' prime UK pass-through RMBS of 2003-2007 vintage had a loss coverage 9.2x when factored against the agency's central expectation of a 30% peak-to-trough UK house price decline and increasing defaults based on the performance of prime mortgages during the recession of the early 1990s," said Francesca Zwolinsky, Director in Fitch's RMBS team.
"Notwithstanding, Fitch analysis showed that 'AAA' prime pass-through RMBS were well placed to withstand a significantly deeper recession with the breakeven point being a scenario of 60% house prices declines in combination with a default rate of 30% - equivalent to approximately 4x-5x the default rates seen during last recession," Zwolinsky added.
This analysis was specific to UK prime pass-through transactions and was not applied to the master trust transactions due to the complex nature of the structures. However, Fitch evaluated the collateral of each master trust programme on a loan-by-loan basis against its house price and default rate predictions and performed an in-depth cash-flow analysis whereby the ratings were further stressed assuming the occurrence of a number possible events, including, but not limited to, various prepayment speeds, the inability of originators to replenish the trusts and a breach of a non-asset trigger. Fitch found that under such stress, negative rating migration was expected to be minimal and confined to the lower-rated tranches only. While notes assigned a rating equal to, or greater than 'A', are not expected to show any negative rating migration under this stress scenario, 62% of the total outstanding 'BBB' notes by value and 75% of the total outstanding 'BB' notes by value faced the possibility of downgrade.
