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26 RATING CRITERIA PUBLISHED FOR STATE HOUSING FINANCE AGENCY MBS PASS-THROUGH BONDS Fitch Ratings released a sector-specific report for rating state housing finance agency (SHFA) bonds secured, on a pass-through basis, primarily by mortgage-backed securities (MBS) called "State Housing Finance Agencies: MBS Pass-rough Bond Rating Criteria." is report will replace the September 2014 state housing finance agency Fitch rating report. According to the report, these bonds are guaranteed by Ginnie Mae, Fannie Mae's mortgage pass-through certificates that will now be referred to as MBS, or MBS guaranteed by Freddie Mac and pledged to the trustee for the holders of the bonds. e report also identifies three key rating factors considered by Fitch that affect the credit quality of MBS pass-through bonds, including government-sponsored enterprise (GSE) guaranty, transaction and legal analysis, and cash flow. For the government-sponsored enterprise guaranty rating, Fitch notes that the GSEs as a whole are the primary drivers of this rating's unconditional guarantee of full and timely payment on the MBS that secures the bonds. Additionally, the performance of the underlying loans or MBS servicer is not factored into the rating on the bonds. "Each of the GSEs, acting through GSE-approved master servicers, purchases mortgages, assembles them into pools, creates trusts from the pools of mortgages, and sells undivided ownership interests in the trusts through issuances of MBS," the company reported. "e GSEs guarantee timely payment of the interest and principal on the distribution dates for the related MBS, regardless of the performance of the underlying mortgages." e transaction and legal analysis rating ensures that documents are reviewed for verification of correct structural features and pass-through securities provide an on-time, full payment to bondholders, according to Fitch. is analysis focuses on the pledge of MBS revenues and timing provisions for payment on the underlying MBS. It also reviews the structure of governing the flow of funds, timing of payments, and reserve accounts of bondholders. "Fitch confirms in the legal documents that MBS principal repayments are passed through to pay or prepay a like amount of principal on the bonds so that, throughout the term of the bonds, the MBS principal amount equals or exceeds the outstanding bond amount," Fitch said. In the cash flow analysis rating, Fitch mainly focused on preliminary cash flows that stem from a third party in assigning a rating to determine that the legal document provisions, including the MBS principal amounts, interest rates, timing of payments, fee structure, and sizing of reserves, are accurately reflected. "e cash flows demonstrate payment of scheduled principal and interest on the bonds with no mortgage prepayments as well as with various stressed prepayment assumptions," Fitch said. "Fitch reviews final cash flows, prepared by a third party following the pricing of the bonds, to verify that projections and assumptions contained in preliminary cash flows and on which Fitch's rating is based, do not materially differ from the actual MBS deposited into the trust." WITH FEWER WRITE-OFFS AND SEVERE DELINQUENCIES, BORROWERS ARE MANAGING MORTGAGE DEBT BETTER Borrowers are managing their mortgage debt better, reporting substantial declines in write-offs and severe delinquency rates, accord- ing to Equifax's Q1 2015 National Consumer Credit Trends Report. e total balance of write-offs for first mortgages and home equity lines and loans (excluding those in bankruptcy) for Q1 2015 was $12.34 billion, a year-over-year decline of 32.6 percent. Likewise, the percentage of loans severely delinquent (90 or more days overdue or in bankruptcy or foreclosure) on first mortgages declined year-over-year from 3.27 percent in Q1 2014 to 2.35 percent in Q1 2015. e severe delinquency rate on home equity installment loans fell from 2.59 percent in Q1 2014 to 1.98 percent in Q1 2015, while balances declined by 16.4 percent year-over-year in Q1 down to $136.1 billion and accounts declined by 10.6 per- cent down to 4.5 million for the same period. Meanwhile, home equity revolving lines of credit reported a year-over-year severe delin- quency rate decline to 1.47 percent in Q1 2015 (from 1.71 percent a year earlier). Balances on home equity revolving lines of credit reported a year-over-year decrease of 3.1 percent (down to $509.8 billion) and accounts declined by 4.3 percent (down to 11.4 million) from Q1 2014 to Q1 2015. "We're seeing borrowers become increasing- ly better at making on-time payments, but we're also seeing a faster rate of amortization due to low interest rates," said Amy Crews Cutts, chief economist at Equifax. "Because a larger portion of each payment is going to principal, consum- ers are now paying off their mortgage debts faster than they would have just a few years ago. Overall mortgage balances are unchanged from a year ago, which means new mortgage credit is exactly offsetting the payoffs." e Equifax data revealed that the total credit limit originated on HELOCs (home equity lines of credit) was $9.5 billion in January, a seven-year high. e number of new accounts originated jumped year-over-year by 20 percent for January, up to 88,000. e average HELOC loan credit limit experienced a 5.7 percent year- over-year increase in January, up to $108,010. e report also found an increase in sub- prime lending. e number of new HELOCs originated in Q1 for borrowers with an Equi- fax Risk Score below 620 increased year-over- year by 36 percent (up to a total credit limit of $49.3 million). e percentage of new HELOC accounts that were subprime also increased, from 1.3 percent in Q1 2014 up to 1.5 percent in Q1 2015. "With so many homeowners having very low interest rates on their first mortgage, the increased demand for HELOCs makes sense," Cutts said. "ey don't want to refinance the first lien either because the new rate would be higher or they would have to pay large closing costs, when all they want to do is tap a little equity to make improvements or fund some other need."

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