DBRS Finalizes Ratings of MCAP RMBS Issuer Corporation, Series 2018-1

DBRS Limited (DBRS) finalized the provisional ratings on the Mortgage Pass-Through Certificates, Series 2018-1 issued by MCAP RMBS Issuer Corporation (the Issuer) as follows:

-- AAA (sf) on the Class A Certificates
-- AA (high) (sf) on the Class B Certificates (collectively, the Rated Certificates)

The 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 $247.5 million first-lien, fixed-rate, owner-occupied, conventional Canadian residential mortgages with a maximum loan-to-value (LTV) of 80% at origination. The weighted-average LTV was 68.9% and the weighted-average credit score of the borrowers was 766 as of the Cut-Off Date.

(2) The experience of MCAP Service Corporation (MSC) in the residential mortgage market, with strong performance history in its other securitization funding programs and servicing capability.

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

(4) MSC and the investment-grade-rated Performance Guarantor provide lifetime 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). Balloon risk is considered to be low in this transaction due to strong asset quality, the financial strength of the Performance Guarantor, proven refinancing liquidity during the financial crisis, and if the Seller does not offer to renew a performing mortgage that satisfies the Seller’s underwriting criteria (at a rate consistent with the Seller’s then-prevailing posted mortgage rates) and the borrower has not entered into an agreement with any other lender to renew or refinance the mortgage prior to its maturity date, the Master Servicer (including a replacement Master Servicer) will extend the maturity date of the mortgage up to five years (to no later than the Rated Final Distribution Date) at a rate equal to the greater of the existing interest rate or the Seller’s prevailing posted mortgage rate at the time of the extension, in order to prevent the mortgage from becoming delinquent or defaulted at maturity. To assess the balloon risk, DBRS nevertheless considers the probability of no lender liquidity at the end of the loan tenure and a hypothetical 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. When determining the loss severity of loans that default as a result of non-renewal, since such borrowers have been current on their mortgage payments and the timing of default is known, DBRS considers scheduled mortgage payments and a certain level of house price appreciation during the mortgage term.

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 Issuer’s ability 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 12, 2018, and is the second-largest mortgage finance company in Canada, with $65.9 billion of assets under administration as at YE2017. MSC, as the initial Master Servicer, is a wholly owned subsidiary of the Performance Guarantor.

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

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.

The principal methodologies are Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 2017), Legal Criteria for Canadian Structured Finance (July 2017) and Operational Risk Assessments for Canadian Structured Finance (December 2017), which are available on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.