DBRS Publishes Updated Canadian HELOC Methodology

DBRS has today published an updated version of its methodology for rating Canadian home equity line of credit (HELOC) transactions. The methodology kept the essence of the April 2009 methodology intact and updated the following sections:

(1) Quantitative Analysis: A loan-level analysis will be conducted first before the cash flow analysis. The outputs of default frequency and loss severity from the Canadian residential mortgage-backed securities (RMBS) Model are used in subsequent cash flow analysis. This revised two-step approach is consistent with the approach used for Canadian RMBS transactions and replaces the former method of assuming a base-case loss rate based on historical performance, multiplied by stress multiples commensurate with the rating categories.

(2) Cash Flow and Structural Analysis: The discussion of default timing curves, interest rate stresses and swaps has been expanded to provide more details on DBRS’s assumptions and expectations and is consistent with those used in Canadian RMBS cash flow analysis.

(3) Insured HELOCs: Credit enhancement criteria for insured HELOCs have been added for AAA/R-1 (high), AA/R-1 (middle), “A”/R-1 (low) and BBB/R-2 (high) notes. The criteria are consistent with those for insured Canadian RMBS transactions.

(4) Commingling: DBRS’s partial commingling criteria for revolving asset pools have been added.

DBRS has reviewed all the outstanding Canadian HELOC transactions based on the updated methodology and determined that no rating actions are warranted.