DBRS Publishes RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology

DBRS has today published its methodology “RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities (RMBS) Model and Rating Methodology.” This methodology, effective as of the date of this press release, supersedes the previous methodology “RMBS Insight: U.S. Residential Mortgage-Backed Securities Loss Model and Rating Methodology” dated January 2012.

In this methodology, DBRS provides the following key updates to RMBS Insight, its residential loss model that estimates loan-level default probability, loss severity and expected loss for a pool of mortgage loans.

(1) The inclusion of an agency model that covers 30-year fully amortizing fixed-rate agency loans with full documentation.
(2) Updated house price model and forecast, as well as state-by-state foreclosure timelines.
(3) Additional variables with respect to loan modification and documentation type.
(4) A more refined approach in assessing purchase money mortgages.

RMBS Insight 1.2 now includes an agency model that applies to 30-year fully amortizing fixed-rate agency loans with full documentation. The model is based on the loan-level datasets released by the government-sponsored enterprises in 2013. In addition, as the housing market has been gradually improving, DBRS updated its home price model to project a slight increase in home prices in the next two years. Meanwhile, protracted legal processes have caused the foreclosure timelines to extend in certain states, particularly in the judicial states.

With respect to modifications, additional variables, such as pre-modification delinquency status and the ratio of monthly payments before and after modification, are introduced after observing their impact on the performance of modified loans. A further review of the performance of purchase money loans indicates that such loans, as compared to refinance mortgages, move from being a risk factor to a benefit as credit quality increases. Lastly, DBRS now adopts five levels of documentation types to conform to the verification levels defined in the American Securitization Forum RMBS Disclosure Package.

DBRS does not deem the methodology updates to be material as RMBS Insight 1.2 substantially retains the core conceptual and structural framework of RMBS Insight 1.0 including:
(1) Comprehensive coverage of RMBS assets;
(2) Metropolitan Statistical Area-level home price forecasts and regional economic factors, such as unemployment rates, per capita income and growth rate in civilian labor force;
(3) Concentration risk by geography and loan size; and
(4) Asset correlation and simulation approach to derive rating category stresses.

A preliminary impact analysis performed on a vast majority of the outstanding U.S. RMBS securities rated by DBRS (excluding bonds with writedowns and net interest margin securities) does not indicate that the resulting rating differences are significant. A substantial portion of the reviewed bonds indicated a potential confirmation or upgrade. As the housing market, the DBRS home price forecast and transaction performance continue to improve, it is not surprising to see the number of upgrades exceed that of downgrades, as indicated by the impact analysis. DBRS expects the positive trend to continue in the foreseeable future. It is worth noting that the above impact analysis merely considers model-to-model, as opposed to model-to-actual, rating changes. The DBRS surveillance review does apply certain qualitative factors that may not have been accounted for in a typical loss or cash flow analysis.

The full methodology providing additional analytical detail is available by clicking on <a href=" http://dbrs.com/research/265561/rmbs-insight-1-2-u-s-residential-mortgage-backed-securities-model-and-rating-methodology.pdf "target=”_blank”> RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology </a> or by contacting us at info@dbrs.com.