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

DBRS, Inc. (DBRS) has today published its updated methodology “RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology.” This methodology, effective as of the date of this press release, supersedes the previous methodology dated December 2014 under the same title.

The primary update relates to the analysis and incorporation of the Freddie Mac actual loss data on nearly 400,000 defaulted loans released in December 2014. Instead of applying loss severity determined by a schedule, certain Freddie Mac risk transfer securitizations have and will apply actual realized losses on mortgage loans. DBRS analyzed the loss data in its non-agency RMBS Insight 1.2 model and concluded that the loss severity module in RMBS Insight 1.2 performs well on the agency loss data and there were no adjustments necessary nor any benefit from fitting a model specifically to the Freddie Mac loss data.

The second update relates to non-agency prime transactions issued in 2010 and later. According to Intex data, the market has issued 87 such securitizations totaling approximately 40,887 loans and $32.1 billion as of April 30, 2015. The performance of such prime securitizations has been excellent, with only 11 loans having a payment status of more than 60+ days delinquent (including bankruptcy, foreclosure and real estate owned). Additionally, there has been a 0.04% loss to date on one transaction. Positive loan attributes, along with conservative underwriting standards, particularly with respect to verification of documents contributed to good performance. In addition, almost all of these transactions employed third-party due diligence reviews covering credit, compliance and property valuation. In this update, DBRS gives slightly more credit to such prime securitizations with respect to certain characteristics as warranted by historical performance.

Finally, DBRS adds the following features in its RMBS Insight 1.2 model:
(1) Certain features unique to the Freddie Mac actual loss securitizations.
(2) For pools with atypical geographic concentration, the ability to apply additional conservatism with respect to market value decline, unemployment and asset correlation assumptions, above the model-generated baseline stresses.
(3) Stop servicer principal and interest advances on delinquent mortgages at specific periods ranging from 30 to 180 days rather than advancing through the life for transactions that may incorporate this feature in the future.

The only RMBS transactions that may be affected by the above updates are non-agency prime securitizations rated from 2010 and later. DBRS does not deem the methodology updates to be material as the credit given to such prime securitizations, as described above, is a small increase. In addition, an impact analysis, which considers model-to-model as opposed to model-to-actual (as determined by a rating committee) rating changes on a majority of such securities rated by DBRS, indicates that the potential rating actions are expected to be confirmations or upgrades.

In conjunction with this press release, the DBRS surveillance team reviewed all outstanding non-agency prime securities from 2010 and onward, and took appropriate rating actions under the updated methodology if warranted. Please refer to the press release “DBRS Takes Rating Actions on U.S. RMBS Securities” dated June 1, 2015, for details.

Notes:
The full methodology providing additional analytical detail is available by clicking on the link under Related Research to the right of the screen or by contacting us at info@dbrs.com.

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