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Fitch: Fast Rate Rise Would Hurt US CMBS, Some RMBS

04/14/2015 | 02:27pm EDT

While the Federal Reserve will most likely raise rates gradually beginning around midyear, faster increases and a corresponding shock to the economy would likely leave most US structured finance ratings untouched. However, it could slow the refinancings that will be crucial to the CMBS market and could hurt some RMBS deals that include legacy adjustable rate mortgages, Fitch Ratings says.

Fitch created a shock scenario to help understand how faster rate increases and a decline in the US economy would impact the structured finance market. We expect the Fed's actual average policy rate for 2016 to be 1.6%. In the shock scenario, we assumed inflation would rise to 4.5% and force the Fed to raise its annual target to 4% in 2016. We also assumed 0% real US GDP growth, unemployment rising steadily to 7% and the yield on 10-year Treasuries reaching 5.5% in 2016.

Most ratings would be stable under this scenario. In our view, the Great Recession has already tested most legacy transactions and those ratings have already been adjusted. And, the economic shock waves in the scenario could be partially offset by the decline in crude oil, if prices remain at or near their current levels through 2016. The generally negative impact on the still-challenged housing market could raise consumer debt costs and slow spending activity. However, lower gas prices and heating oil costs could also make it easier for consumers to make debt service payments.

Some CMBS and RMBS subsectors, however, could be impacted directly and indirectly under this scenario.

The CMBS market would see the greatest impact, in part due to the maturity wall that would coincide with the scenario's most significant disruption. Approximately $177 billion of multiborrower, fixed-rate transactions are scheduled to mature from 2015 to 2018. The weighted average coupon for those loans is about 5.7%. As rates increase, potential loan proceeds would generally decrease. Demands for more equity would be unlikely to be met as many of the loans maturing in the next several years are already over-leveraged.

RMBS transactions issued prior to 2010 would also be at risk in the scenario. Pools with relatively high numbers of adjustable-rate mortgages would be particularly exposed to higher payments. A rise in rates and an economic slowdown would also likely affect home prices, adding negative pressure on legacy borrowers with little or no home equity. Fitch would expect borrowers in transactions issued since 2010 to be able to absorb the changes in this scenario without a significant increase in ratings risk due to strong home equity positions and large liquid reserves.

The impact on ABS would likely be small. The impact on autos and student loan ABS performance would be minimal. Certain credit card ABS metrics would see some variations that would not be likely to change ratings. The knock-on effect from other macro-economic stresses such as rising unemployment and other labor market strains could have a more significant impact on ABS performance variables across the board. However, we would expect ABS ratings volatility under the scenario to be relatively low, similar to its performance during the Great Recession.

For more information, see Fitch's new report: "U.S. Structured Finance Interest Rate Shock Implications" available at the above link or on www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

US Structured Finance Interest Rate Shock Implications

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=784068

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


ę Business Wire 2015
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