DBRS Publishes Methodology for Rating Reverse Mortgage Securitizations in Canada

DBRS has today published its methodology for rating Canadian reverse mortgage securitization transactions (the Methodology). The publication of this Methodology is part of DBRS’s continued effort to provide market participants with insight into the rationale behind DBRS’s rating opinions.

A reverse mortgage is a non-recourse loan offered to elderly individuals or couples, secured by a first-ranking security interest in their residential property. Unlike traditional mortgages, no interest or principal payments are required for reverse mortgages during the owner’s occupancy, while interest continues to accrue on the mortgage amount. At the termination of the occupancy, the property is sold and the proceeds are used to repay the mortgage amount, including accrued interest.

The Methodology outlines the analytical approach that DBRS takes to rating reverse mortgage securitizations in Canada, and discusses the key elements that DBRS evaluates through qualitative and quantitative analysis. The Methodology is separated into three main sections: first, a review of the characteristics of reverse mortgages, including the elements of property appreciation, expected occupancy term and interest rate assumptions; second, a summary of the core legal and structural elements that DBRS reviews; and third, a summary of the cash flow stresses performed when evaluating enhancement levels.

Each DBRS rating is based on an analysis of the underlying assets of the securitization, the transaction parties involved, the legal and funding structure and the credit enhancement available. These considerations are assessed under various stress scenarios to ensure that commensurate enhancement is available.

The methodology is available by clicking the link below or contacting us at info@dbrs.com