DBRS Updates Assumptions for Delays to Stressed Recovery Curves for Rating U.S. RMBS Servicing Advance Transactions

DBRS has updated its methodology assumptions used to delay the stresses applied to servicing advance reimbursement recovery curves due to anticipated lengthening of liquidation timelines.

Beginning in October 2010, certain servicers had announced that they had procedural defects in their foreclosure processes. Federal and state regulators subsequently launched investigations and various servicers admitted to foreclosure procedural defects and some of these servicers had temporarily suspended foreclosures. The procedural defects that have been reported include employees of the servicer signing foreclosure documentation without having full knowledge of the facts contained in the related documentation and without having the physical presence of a notary public. In the recent past, servicers have announced that they have made changes to their foreclosure processes to ensure that they are in compliance with foreclosure laws and have begun lifting their temporary suspensions. Going forward, we believe greater regulatory oversight in the foreclosure process, additional foreclosure procedural or administrative requirements and contested foreclosures may be expected resulting in the lengthening of liquidation timelines.

DBRS recently conducted an analysis, located by clicking the link below, which compares year over year state-by-state liquidation timelines that confirm an increase in timelines from 2009 through 2010.

In response to the observed and anticipated extension in liquidation timelines, DBRS has made adjustments to the assumptions it uses to delay the stressed servicing advance reimbursement recovery curves. DBRS has added an additional 6 months to its baseline delays, illustrated in the table below, for loan-level advance reimbursements. DBRS assumes a negligible amount of recoveries to occur during these periods. Recoveries are applied using a linear increase from 0% in month 1 to the stressed recovery rates at the terminal delay period.

Recovery Delay for Loan-Level Reimbursements
Rating Level----------Judicial--------------Non Judicial
AAA-----------------------20------------------------15
AA-------------------------18------------------------13
A---------------------------16------------------------11
BBB----------------------14------------------------10
BB------------------------12-------------------------9
B--------------------------10-------------------------8

Further delays may be added to the stressed recovery curves based on the review of the servicer’s state-level liquidation timelines, state concentrations in the underlying RMBS transactions, servicer’s current foreclosure process and financial condition.

DBRS’s updated methodology for rating U.S. RMBS servicing advance transactions is located by clicking the link below.