Report: Progress Remains Slow but Steady for RMBS Sector

While the onslaught of new mortgage regulations in the last year has created headaches for lenders, it's had a clear positive impact in one area, Fitch Ratings says in a new report: the residential mortgage-backed securities (RMBS) sector.

In its latest look at the RMBS segment, the company says that while the market still has some rebuilding left to do, it "has seen some rather substantial improvements of late," owing in large part to improved loan underwriting standards in recent years. According to Fitch managing director Rui Pereira, the performance of recent vintage mortgage loans is the best on record so far.

"New legislation has completely eliminated some problem loan types like no documentation loans and has increased the liability of lenders that make irresponsible loans," Pereira said.

Another major improvement, Fitch says, is the quality of loan-level data that's available at issuance now that the industry has created expanded, standardized review and verification processes.

"These factors allow for more reliable credit analysis and earlier detection of negative credit trends," the agency said in its report.

Fitch isn't the only firm projecting a bright outlook for the sector. Last month, Moody's predicted a slow increase in private-label RMBS issuance and continued strengthening in credit quality.

Despite those strengths, Fitch's report also points to areas that "still require close attention," chief of which is the issue of reps and warranties in new deals.

"While there have been notable improvements for rep and warranty enforceability, a lack of standardization across transactions is keeping investors wary," Pereira said.

The agency also said the RMBS market remains vulnerable to political and regulatory risk, specifically from outside-of-trust settlements and government actions that could affect investors.