DBRS Publishes European RMBS Insight Methodology and Spanish Addendum

DBRS Ratings Limited (DBRS) has today published its “European RMBS Insight Methodology” (the Methodology) and “European RMBS Insight – Spanish Addendum” (the Spanish Addendum, or Addendum).

Publication of the Methodology and Addendum follows the conclusion of the Request for Comment period, which began on 30 March 2016. DBRS did not receive any comments to either the proposed Methodology or Addendum.

The Methodology and Addendum, effective today, supersedes the Master European Residential Mortgage-Backed Securities Methodology and Jurisdictional Addenda published in January 2016 for DBRS ratings assigned to Spanish RMBS and Spanish covered bonds.

The changes to the Methodology and Spanish Addendum are deemed material. The Methodology introduces a new proprietary default model (European RMBS Insight Model or the Model) to forecast the expected defaults and losses of portfolios of European residential mortgages. The Model combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan level defaults and losses. Loan scoring models and dynamic delinquency migration matrices are developed using jurisdictional specific data on loan, borrowers and collateral types. In addition, the European RMBS Insight Model uses a home price model to generate Market Value Declines (MVDs).

Jurisdictional specific addenda will be published for each country where the Methodology will be applied for rating European RMBS. Each addendum will outline the country specific aspects of the Methodology to estimate defaults and losses, including an overview of each mortgage scoring model (with jurisdictional specific parameters to assess credit risk), summary of delinquency migration matrices and MVDs.

The first addendum published is the Spanish Addendum. Analysis of the Spanish residential mortgages per the Spanish Addendum includes indexation of the underlying property values for the both the default and losses. The Spanish Addendum details the Spanish Mortgage Scoring Model (Spanish MSM), which was constructed using logistic regression with 19 parameters from 15 variables determined to assess the relative credit risk Spanish residential mortgages. In addition, 16 risk segments were estimated based on scoring of the universe of eligible loans (per defined DBRS criteria) used to construct the Spanish MSM with a delinquency migration matrix estimated for each risk segment based on the observed roll rates. Rating scenario MVDs are determined for each of the 19 autonomous Spanish regions (and the national level) to calculate losses.

DBRS currently rates 69 classes of notes across 35 Spanish RMBS transactions, and ten Spanish covered bond programmes. The expected impact of the adoption of the Methodology on outstanding Spanish RMBS is expected to be neutral to positive. However, a few negative rating actions may occur and are dependent on the underlying collateral characteristics and structural features. DBRS expects the impact on outstanding Spanish covered bond ratings to be neutral. DBRS expects to publish the relevant rating actions in the near term.