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Fitch Doles Out Upgrades But Insists RMBS Still Vulnerable

While perhaps not completely out of the woods yet, residential mortgage backed securities (RMBS) are on the mend with some improved performance of late, according to ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp.

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An ""improving U.S. housing market and stable macro environment"" are boosting performance, leading Fitch to upgrade about 480 RMBS bonds so far this year and harbor a ""Positive Outlook"" on about 800 RMBS bonds.

Positive Outlooks are particularly prevalent among real estate mortgage investment conduits (REMICs) issued since the start of 2010, subprime deals issued from 2003 to 2005, and seasoned manufactured housing, according to Fitch.

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Looking ahead, the agency does not anticipate widespread upgrades in the year to come.

""[M]any RMBS securities continue to face sizeable risks that will limit the number of upgrades this year,"" the agency warned.

Fitch also put the new upgrades into perspective, stating, ""it is important to note that while a welcome improvement, the recent upgrades encompass a small percentage of the total number of securities that Fitch monitors.""

Possible upgrades may occur among loans with ""relatively short remaining lives within sequential payment priority transactions,"" the agency stated.

While Fitch has noticed increasing collateral gains for 2006 and 2007 deals, the result will likely be ""improved principal recoveries on distressed classes rather than rating upgrades,"" Fitch said.

High delinquencies, risk resulting from adverse selection, and elevated underwater rates continue to pose threats to RMBS, according to Fitch.

""What's more, U.S. RMBS transaction cash flows remain vulnerable to servicer actions including advancing policies and modification reporting,"" Fitch added.

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