From Fitch today:
Fitch Ratings-Sydney-15 August 2012: Fitch’s stress tests of Australian residential mortgage-backed securities (RMBS) show the resilience of the ratings even through a severe sustained recession and house price deterioration.
“Fitch conducted three scenarios stressing interest rates, unemployment and property price declines as the key drivers of defaults and losses. Concurrent increases in all three were run over a three year period, as well as removing the benefit provided by lenders mortgage insurance to show that Australian RMBS transactions, on the whole would remain resilient”, said Ben Newey, Director in Fitch’s Australian Structured Finance (SF) team.
A moderate scenario was defined by Fitch as unemployment more than doubling to 11% from the current level of 5.2%, the standard variable interest rate (SVR) on mortgages rising to 12% from the current rate of 6.85% and house prices falling by 35% from current levels. This scenario is commensurate with overall mortgage defaults rising by 8%. Under this scenario approximately 97% of ‘AAAsf’ Prime RMBS ratings would remain unchanged.
A severe scenario of unemployment at 15%, a SVR of 15% and a house price crash of 50% would be expected to increase mortgage defaults by 18% on average. Fitch believes such an extreme scenario to be very remote and well beyond the realm of more plausible downside scenarios. It is expected that under a severe economic scenario coupled with a partial impairment of lenders mortgage insurance (LMI) providers to pay claims, approximately 32% of Australian ‘AAAsf’ prime RMBS tranches would be downgraded to ‘AAsf’ or worse. A second severe scenario assuming no LMI claims are paid commensurate with the LMI provider defaulting, results in a downgrade of 63% of ‘AAAsf’ tranches to ‘AAsf ‘or worse. All tranches currently rated ‘BBBsf’ or lower would be downgraded to distressed levels (‘CCCsf’ or lower) under both severe stress scenarios.
In both the moderate and severe scenarios, ‘AAAsf’ tranches from less seasoned transactions were found to be more susceptible to downgrades, reflecting the lower level of credit enhancement build up compared to older vintages.
Fitch emphasises that the stresses applied in this report relate to asset performance stresses. They do not address issues such as the impact of the default of counterparties that support SF transactions or any deterioration in the credit position of the related sovereign.
These stress tests were carried out as part of a wider study into the degree of macroeconomic stress necessary to cause large movements across rating categories, including ‘AAAsf’ ratings. Fitch expects to conduct similar stress test reports in the coming months for other SF asset classes.