DBRS Releases Appendix (Reverse Mortgages) to Rating Canadian Structured Finance Transactions

DBRS Limited (DBRS) has today released an appendix (the Methodology) to its methodology Rating Canadian Structured Finance Transactions, applying to transactions backed by reverse mortgages. The Methodology is a condensed and revised version of the previous methodology “Rating Reverse Mortgage Transactions in Canada,” archived in March 2012.

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 borrower’s occupancy, while interest continues to accrue on the loan balance. At the termination of the occupancy, the property is sold and the proceeds are used to repay the loan balance, including accrued interest.

The Methodology provides a review of the key credit factors of reverse mortgages, including expected occupancy term, property value, house price appreciation and mortgage/interest rates. Stress testing assumptions used by DBRS are also discussed in the Methodology. The stresses applied to market value decline (MVD) and interest rates are consistent with those applied to Canadian RMBS transactions. Along with the Methodology, DBRS developed a proprietary loan-level cash flow model to incorporate different MVD, interest rate and prepayment assumptions commensurate with the desired rating of the notes.

There is only one issuer of this asset class in Canada, and the related ratings were last confirmed on February 5, 2013. DBRS notes that the application of the Methodology and cash flow model has no impact on the ratings.

DBRS’s criteria and methodologies are publicly available on its website, www.dbrs.com, under Methodologies.