DBRS Enhances U.K. Mortgage Credit Model and Methodology

DBRS has today released an enhanced credit model designed to assess risk in U.K.-based residential mortgage transactions. The model (located at www.dbrs.com/ukrmbs) is available in open format at no fee to market participants as part of the DBRS aim to increase transparency in the ratings process. Along with the enhanced model, DBRS has also updated and expanded it “U.K. Residential Mortgage Credit Criteria” methodology.

The release of the model and methodology updates the earlier release of “U.K. Residential Mortgage Default Criteria” in January 2007 and includes the remaining components required to assess U.K. mortgage credit risk.

DBRS differentiates its approach by focusing specifically on observed historical performance in order to estimate base case assumptions. DBRS believes that accurate base case predictions will greatly assist equity and lower tranche investors in their risk assessment and will provide a meaningful benchmark against which deals can be monitored.

In-house research to date reveals strong evidence at both the portfolio level and the loan level that despite dramatic house price increases, foreclosed properties have suffered significant market value declines. DBRS believes that this may have been underestimated in alternative approaches.

Victoria Johnstone, Senior Vice President of the EMEA Structured Finance Team at DBRS, says, “We feel that it is crucial to begin the ratings process from the ground up by ensuring we can measure and predict risk in relatively non-stressful conditions. This gives us a very strong platform from which higher rating estimates can be derived.”

The approach allows for predictive base case probabilities of default (PDs) and losses given default (LGDs) to be estimated at both the loan and portfolio levels over both a two-year period and lifetime horizons. It is also used as a platform to derive higher rating stress scenarios using portfolio modelling techniques.

“Our goal is to provide tools that give visibility into credit analysis and insight into how market participants can assess deal performance over time in a more dynamic way. We adopt the same approach across the rating of other structured finance classes,” Johnstone adds.

DBRS has also ensured that the model adjusts for loan behaviour through time (such as arrears and seasoning). This means that the methodology can be reliably used not only at the pre-bond issuance stage (or for the initial assessment of portfolio purchases), but also integrated into the surveillance process.

The methodology providing DBRS's processes and criteria is available by contacting us at info@dbrs.com

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Citigate Dewe Rogerson
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