Outlook for European Residential Mortgage Backed Securities Remains Stable

Despite the global macro-economic slowdown, downgrades of residential mortgage backed securities (RMBS) are likely to be limited to the junior notes in most affected sectors, according to Fitch Ratings.

The rating outlook for RMBS in several European countries, including Belgium, France, Greece, Ireland and the Netherlands, remains Stable.

In the UK non-conforming sector in particular, delinquency and repossession rates continue to rise. With negative events unfolding in the wider economy, further declines in these key metrics are expected to continue well into 2009. As a result, ratings are likely to be negatively affected for the remainder of 2008 and into 2009 - particularly since UK house prices are expected to remain under significant pressure during this timeframe.

Fitch notes, however, that its UK non-conforming index shows a wide array of performance and continued upgrades in the higher rating categories can still happen for transactions that have experienced significant de-leveraging and where arrears and loss performance is materially better than original expectations.

UK prime RMBS is expected to experience further deterioration in arrears performance. An increase in loss severities is expected within transactions, especially given that the UK has already seen an approximate 12% house price decline. Despite this deterioration in performance, it should be noted that these are from historically low levels. The outlook for the remainder of 2008 and into 2009 for UK prime RMBS is stable for older vintages but negative for more recent vintages.

Spanish RMBS is experiencing deterioration in collateral performance with rising arrears levels, albeit starting from a relatively low base. However, Fitch does not expect significant rating volatility in Spanish RMBS as many transactions have benefited from prepayments and transaction de-leveraging. The more recent vintages are, however, more vulnerable.

German RMBS transactions are expected to remain under pressure with higher-than-expected levels of arrears and, more concerning, significantly lower recoveries than originally assumed. Adjustments to Fitch’s Germany market value decline (MVDs) assumptions could have an impact on classes above the most junior tranches.