Hereâs something that might have escaped your radar during Christmas week â a mass downgrade of so-called `Scratch and Dentâ RMBS deals by ratings agency Fitch. A Scratch and Dent mortgage is a funny thing. Itâs basically an industry term for home loans which have some sort of defect â that is, the loan might have been made outside of lending guidelines, or with documents missing, or is simply non-performing. Thereâs a bit more detail in the relevant Fitch press release: Fitch Ratings-New York-29 December 2009: Fitch Ratings has affirmed 246 and downgraded 293 classes in 82 U.S. Scratch and Dent residential mortgage-backed securities (RMBS) transactions. The Scratch and Dent transactions reviewed were comprised at the time of issuance of some combination of performing, re-performing, sub-performing, or non-performing collateral. Many of these transactions contain collateral that was seasoned and/or seriously delinquent at the time of the transactionâs issuance. The reviewed transactions were issued in 1997 to 2007. To project future defaults, Fitch used the mortgage poolâs net loss rate average over the past 12 months adjusted higher or lower for the poolâs change in 90+ day delinquencies over the same period. Loss severities were projected based on issuer specific historical loss severity trends. Fitch generally assumed no improvement in net loss rate trends for at least two years. The average expected loss for the pools reviewed was 32% as a percentage of the remaining pool balance and 21% as a percentage of the initial pool balance. And just to give you an idea of the severity of these downgrades, youâve got stuff like the M1 class of C-BASS 2006-RP2, a Scratch and Dent mortgage-backed deal issued by Credit Suisse in 2006, being revised from AA to CC, and assigned a negative outlook. These are basically bad mortgages getting worse, of course, but it does suggest that such loans are still filtering through the US financial system, or at least, through the ratings agencies. http://ftalphaville.ft.com/blog/2010/01/04/118941/scratched-and-dented-rmbs/ Happy New Year !