Report Finds Flaws in Analysis of Re-Performing RMBS Deal

Standard & Poor’s (S&P) may have made some missteps in evaluating the risk of a residential mortgage-backed security (RMBS) transaction that has now been postponed, Fitch Ratings says in a recent report.

In a release issued Friday, Fitch says S&P relied on incomplete home value data for loans contained in the recently announced RMBS transaction to be issued by Bayview Asset Management.

“Specifically,” Fitch said, “S&P elected to disregard the values derived from broker price opinions (BPOs) in lieu of original valuations adjusted for regional market value declines.”

Including the BPO values, the ratings agency says the average loan-to-value ratio (LTV) of the transaction would be 145 percent compared to the 90 percent LTV S&P found in its own examination—putting the mortgages deeply underwater as opposed to simply under-equitied.

Applying its own loss criteria for similar collateral, Fitch says the higher LTVs would result in a 20 percent increase in projected default probably and a 30 percent increase in projected loss severity.

Fitch’s second look is particularly pertinent, considering the transaction—labeled “Bayview Opportunity Master Fund IIIa Trust 2014-9RPL”—was to be the first publicly rated RMBS sale involving formerly delinquent loans since last decade’s crisis.

“Fitch believes that ignoring the BPO values dramatically increases the likelihood of underestimating potential loss severities and results in insufficient credit enhancement,” the firm said in its report. “Fitch has found that for distressed or re-performing loans, updated BPO valuations often indicate a value lower than an indexed property value due to some adverse selection of the properties.”

The transaction, valued at $184.9 million, was postponed by Bayview following S&P’s request for more information about the mortgage pool.