DBRS Publishes Updated 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.” Publication of this methodology follows the conclusion of the Request for Comments period that began on November 3, 2016. No comments were received during this period and no changes were made to the final methodology.

This methodology, effective as of the date of this press release, supersedes the previous methodology dated October 1, 2015, under the same title.

The primary update to the methodology relates to the roll rate analysis when loans migrate from 180-day delinquency to default. DBRS has generally used a 100% roll rate except in certain post-crisis (2009 and later) securitizations where the combined loan-to-value (LTV) ratios are low. In the update, DBRS reviewed a sample of 5.8 million loans in the historical datasets from MBSData, LLC, Fannie Mae and Freddie Mac, consisting of mortgages that became 180-day delinquent from 1999 through 2014 (allowing two years for such loans to eventually default). DBRS then constructed a loan-level model that derives a roll rate based on the loan’s combined LTV, property type, occupancy, product type, loan balance, loan age, data source, year the loan becomes 180 days delinquent, and for modifications, month since modification. DBRS intends to apply the roll rate analysis to post-crisis securitizations where the transactions go through a rigorous data validation and due diligence review, both by third-party review firms. For pre-crisis securitizations or ReREMICs backed by pre-crisis legacy transactions, DBRS will continue to assume a 100% roll rate from 180 days delinquency to default.

The second update refines the loss severity calculation for Federal Housing Administration-insured and Veterans Administration-guaranteed mortgages. In this update, DBRS details the derivation of losses as a shortfall of recovery from the U.S. Department of Housing and Urban Development (HUD) reimbursement and specifies the debenture rate and foreclosure timeline it uses in the calculation of interest reimbursement, in accordance with DBRS’s review of the HUD guidelines.

The third update relates to non-agency prime transactions issued in 2010 and later. According to Intex data, the market has issued 114 such securitizations totaling approximately 52,152 loans and $40.5 billion as of September 31, 2016. The performance of such prime securitizations has been impeccable, with only 23 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 lenders’ verification of documents contributed to excellent performance. In addition, almost all of these transactions employed third-party due diligence reviews covering credit, compliance and property valuation. Based on the above analysis, DBRS will assign the same credit (or penalty) to such prime securitizations, as it does to agency pools, with respect to certain characteristics such as debt-to-income ratios, origination channel and the presence of a co-borrower.

As the fourth change, DBRS updates its loss severity calculation for post-crisis second lien mortgages as underwriting and performance improve. Rather than automatically writing the loan off at 100% loss severity plus six months of interest, if there are any funds remaining after the associated first lien is fully liquidated, such funds will be applied as a recovery to the second lien.

Finally, DBRS seeks to maintain minimum spacing among rating categories in certain securitizations containing large numbers of loans. In such transactions, the model-derived correlation, a primary factor for determining rating level stresses, is often very low, thus resulting in compressed expected losses amongst rating categories. DBRS now maintains a floor of 30 to 40 basis points from lower to higher ratings, in between any two rating levels.

DBRS only deems the first update with respect to roll rate to be material as it introduces a new way to migrate loans from 180-day delinquency to default. The rest of the updates are deemed non-material.

The U.S. RMBS transactions that may be affected by the updates described earlier in the press release are post-crisis securitizations rated from 2009 and onward. An impact analysis that 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 the updates, DBRS will review all affected securities from 2009 and onward and take timely and appropriate rating actions under the updated methodology if warranted.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The full methodology providing additional analytical detail is available by clicking on RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology at <a href="http://www.dbrs.com/research/302765" target="_blank">www.dbrs.com</a> or by contacting us at info@dbrs.com.

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