Adverse selection is leading to rating downgrades for ""one of the strongest U.S. residential mortgage vintages,"" the pre-2005 vintage, according to ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp.[IMAGE] [COLUMN_BREAK]
Residential mortgage-backed securities formed before 2005 ""have historically performed well,"" according to Fitch.
In fact, more than 93 percent have already been repaid in full, and principal losses account for less than 1 percent of the $650 billion vintage.
However, Fitch has placed several underperforming classes from the pre-2005 vintage on ""Rating Watch Negative.""
""Many high-quality mortgage borrowers are refinancing to take advantage of record-low interest rates, leaving the remaining mortgage pools increasingly concentrated with borrowers unable to refinance,"" explained Grant Bailey, managing director at Fitch in a statement Thursday.
The remaining bonds are at risk for negative ratings pressure.
""While additional negative rating actions are likely, pre-2005 senior classes are by and large expected to retain investment grade ratings and recover full principal,"" Bailey said.