DBRS Assigns Provisional Ratings to MCAP RMBS Issuer Corporation, Series 2014-1

DBRS has today assigned provisional ratings to the Mortgage Pass-Through Certificates, Series 2014-1 to be issued by MCAP RMBS Issuer Corporation (the Issuer) as follows:

-- AAA (sf) to the Class A Certificates
-- AAA (sf) to the Class IO Certificates
-- AA (sf) to the Class B Certificates
-- A (sf) to the Class C Certificates
-- BBB (sf) to the Class D Certificates (collectively, the Rated Certificates)

DBRS rating on the Class IO Certificates addresses the risk of default in respect of interest entitlement based on the notional amount outstanding, after consideration of the Class IO Certificate’s position within the transaction payment waterfall.

The Class E Certificates, Class F Certificates and Class Z Certificates (collectively, with the Rated Certificates, the Certificates) are not rated by DBRS.

The ratings are based on the following factors:

(1) The collateral is a diversified pool of $200.8 million first-lien, owner-occupied, conventional Canadian residential mortgages underwritten to prime borrowers with a maximum loan-to-value (LTV) of 80% at origination. The weighted-average LTV was 68.9% as of the cut-off date.

(2) The performance history and servicing capability of MCAP Financial Corporation and MCAP Service Corporation (MSC) in the prime residential mortgage market.

(3) Pass-through structure increases subordination over time.

(4) MCAP Financial Limited Partnership, as the Seller, and investment-grade-rated MCAP Commercial LP, as the Performance Guarantor, provide life-time representations and warranties.

DBRS uses the Canadian RMBS model to estimate default frequency, loss severity and expected loss on a loan-level basis. The RMBS model output does not include the risk of mortgage default at maturity (i.e., balloon risk). To assess the balloon risk, DBRS considers the probability of no lender liquidity at the end of the loan tenure and a hypothetic percentage of loan defaults as a result of non-renewal. The balloon risk is in addition to the credit risk estimated by the RMBS model.

With the RMBS model results and adjustment for balloon risk, DBRS runs a proprietary cash flow model incorporating the transaction structure and assumptions for timing of default, interest rates and prepayments. The result was that the Rated Certificates with the proposed structure could withstand each stress scenario with no loss. The ability of the Issuer to repay interest and principal of the Rated Certificates is consistent with the respective ratings.

The Performance Guarantor, MCAP Commercial LP, is rated BBB (low) with a Stable trend by DBRS as of March 4, 2014, and is the second-largest non-bank mortgage lender in Canada, with approximately $42 billion assets under administration. The Seller and MSC, as the initial Administrator, are both wholly owned subsidiaries of the Performance Guarantor.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Canadian Residential Mortgage-Backed Securities (RMBS) and Home Equity Line of Credit (HELOC) Transactions (November 2013), Legal Criteria for Canadian Structured Finance (September 2013) and Canadian Residential Mortgage Servicer Evaluations (September 2013), which are available on our website under Methodologies.

The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.