Fitch Assigns Ratings to Mortgage House RMBS Series 2021-1P; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-04 March 2021: Fitch Ratings has assigned ratings to Mortgage House RMBS Series 2021-1P's mortgage-backed pass-through floating-rate bonds. The issuance consists of notes backed by a pool of first-ranking Australian residential mortgage loans originated by Mortgage House of Australia Pty Limited and Well Nigh Pty Limited. The notes are issued by Perpetual Trustee Company Limited in its capacity as trustee of Mortgage House Capital Mortgage Trust No. 1 in respect of Mortgage House RMBS Series 2021-1P. This is a separate and distinct series created under a master trust deed. The collateral pool totalled AUD600 million and consisted of 1,129 obligors with a weighted-average (WA) current loan/value ratio (LVR) of 64.4% and a WA indexed current LVR of 64.5% at the 13 January 2021 cut-off date Mortgage House RMBS Series 2021-1P ----A AU3FN0058376; Long Term Rating; New Rating; AAAsf; Rating Outlook Stable ----AB AU3FN0058392; Long Term Rating; New Rating; AAAsf; Rating Outlook Stable ----B AU3FN0058400; Long Term Rating; New Rating; NRsf ----C AU3FN0058418; Long Term Rating; New Rating; NRsf ----D AU3FN0058426; Long Term Rating; New Rating; NRsf ----E AU3FN0058434; Long Term Rating; New Rating; NRsf ----F AU3FN0058442; Long Term Rating; New Rating; NRsf ----G ; Long Term Rating; New Rating; NRsf KEY RATING DRIVERS Sufficient Credit Enhancement Mitigates Expected Coronavirus Impact: Fitch has updated criteria assumptions for Australia to account for potential effects of the coronavirus pandemic. A steady-state arrears adjustment of 1.3% was applied, which increased the 'AAAsf' weighted-average foreclosure frequency (WAFF) modelled by 70bp. The steady-state arrears are calculated using the five-year average 30+ day arrears to December 2019 for Fitch's Dinkum RMBS index multiplied by 1.2. The 'AAAsf' WAFF of 10.7%, from 9.0% in the previous transaction - Mortgage House RMBS Series 2020-1 - is driven by the WA unindexed loan/value ratio (LVR) of 64.4%, self-employed loans of 27.0%, low documentation loans of 7.8%, interest-only loans of 14.8% and steady-state arrears of 1.3% applied to the 60-89 day arrears category The main reason for the higher WAFF is the greater proportion of self-employed and low-documentation loans in the pool. The 'AAAsf' lenders' mortgage insurance (LMI) dependent WA recovery rate (WARR) of 53.1% is driven by the portfolio's WA indexed scheduled LVR of 67.2%, 8.6% of the pool benefiting from LMI and the portfolio 'AAAsf' WA market value decline of 61.9%. The class A notes benefit from credit enhancement (CE) of 8.0%, while the class AB notes benefit from CE of 6.3%. See the following links for Fitch's pandemic-related credit views and analytical approach: - "Global Economic Outlook - December 2020", published on 7 December 2020, available at www.fitchratings.com/site/re/10145707 - "Fitch Ratings Coronavirus Scenarios: Baseline and Downside Cases - Update", published on 7 December 2020, available at www.fitchratings.com/site/pr/10145938 - "Global SF Rating Assumptions Updated to Reflect Coronavirus Risk", published on 3 April 2020, available at www.fitchratings.com/site/pr/10117224 In addition, analytical notes relevant for Australian and New Zealand RMBS transactions are discussed in the commentaries: - "Fitch Ratings' Approach to Addressing Coronavirus-Related Risks for Australian, NZ RMBS", published on 5 May 2020, available at www.fitchratings.com/site/pr/10120792 - "Fitch Ratings Updates Australia, NZ RMBS Criteria Assumptions on Coronavirus Effects", published on 28 July 2020, available at www.fitchratings.com/site/pr/10130287 Limited Liquidity Risk from Payment Holidays: No borrowers in the pool were on payment deferral arrangements at the cut-off date. However, we found that the transaction can withstand 39.7% of the loans in the portfolio being granted payment holidays before needing to draw on principal or the liquidity facility, which is sized at 1.2% of the invested note balance and floored at the lesser of AUD720,000 and the performing asset balance, which excludes borrowers on payment holidays. Low Operational and Servicing Risk: Mortgage House, established in 1986, is a non-bank financial institution headquartered in Sydney, New South Wales. Fitch undertook an operational review and found that the operations of the originator and servicer and their collection timelines, policies and procedures were in line with market standards. We do not expect the servicer's operations to be disrupted by the pandemic, as staff are able to work remotely and have access to the office, if needed. Economic Rebound Supports Outlook: Fitch expects near-term mortgage performance to deteriorate, but to continue to support the Stable Outlook on the notes. We forecast GDP growth to bounce back to 3.8% in 2021, with the unemployment rate falling to 6.2%. The key rating drivers listed in the applicable sector criteria, but not mentioned above, are not material to this rating action. RATING SENSITIVITIES Unanticipated increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case and are likely to result in a decline in CE and remaining loss-coverage levels available to the notes. Decreased CE may make certain note ratings susceptible to negative rating action, depending on the extent of the coverage decline. Hence, Fitch conducts sensitivity analysis by stressing a transaction's initial base-case assumptions. This section provides insight into the model-implied sensitivities the transaction faces when assumptions - WAFF or WARR - are modified, while holding others equal. The modelling process uses the modification of default and loss assumptions to reflect asset performance in up and down environments. The results below should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. Fitch modifies the recovery rate to isolate the effect of a change in recovery proceeds at the borrower level. Factors that could, individually or collectively, lead to positive rating action/upgrade: The rated notes are at 'AAAsf', which is the highest level on Fitch's scale. The ratings cannot be upgraded. Factors that could, individually or collectively, lead to negative rating action/downgrade: A longer pandemic than Fitch expects that leads to deterioration in macroeconomic fundamentals and consumers' financial positions in Australia beyond Fitch's baseline scenario. Available CE cannot compensate for higher credit losses and cash flow stresses, all else being equal. Fitch conducted sensitivity analysis by increasing gross default levels and decreasing recovery rates over the life of the transaction. Downgrade Sensitivity: Notes: A / AB Rating: AAAsf / AAAsf Increase defaults by 15%: AAAsf / AA+sf Increase defaults by 30%: AAAsf / AA+sf Reduce recoveries by 15%: AAAsf / AA+sf Reduce recoveries by 30%: AAAsf / AA+sf Increase defaults by 15% and reduce recoveries by 15%: AAAsf / AA+sf Increase defaults by 30% and reduce recoveries by 30%: AAsf / AA-sf The transaction structure supports LMI-independent ratings for the class A and AB notes. LMI is not required to support the rating due to the level of credit support provided by the lower notes. Coronavirus Downside Scenario Sensitivity: Under Fitch's downside scenario, re-emergence of infections in major economies prolongs the health crisis and confidence shock, prompts extensions or renewals of lockdown measures and prevents a financial-market recovery. Fitch tested this scenario by increasing defaults by 15% and decreasing recoveries by 15%. Notes: A / AB Impact on note ratings of downside scenario: AAAsf / AA+sf Best/Worst Case Rating Scenario International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10 Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action. DATA ADEQUACY Fitch reviewed a small targeted sample of Mortgage House's origination files and found the file information to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio. Prior to the transaction closing, Fitch sought a third-party assessment of the asset portfolio information, but none was made available to Fitch for this transaction. Overall, Fitch's believes the asset pool information relied upon for its rating analysis, according to its applicable rating methodologies, is adequately reliable. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public. REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'. A description of the transaction's representations, warranties and enforcement mechanisms (RW&E) that are disclosed in the offering document and relate to the underlying asset pool is available by clicking the link to the appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class, as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg Contacts: Primary Rating Analyst Eugene Wang, Senior Analyst +61 2 8256 0373 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Bradley Isaac, Senior Analyst +61 2 8256 0306 Surveillance Rating Analyst Eugene Wang, Senior Analyst +61 2 8256 0373 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Committee Chairperson Natasha Vojvodic, Senior Director +61 2 8256 0350 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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