DBRS Publishes Final HELOC Appendix to the RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology

DBRS, Inc. (DBRS) finalized its HELOC Appendix to the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” (the Methodology) following the closure of the request for comment (RFC) period that ended at noon on June 14, 2019.

DBRS received no comments on the HELOC Appendix during the RFC period; therefore, there are no changes to the Methodology that was published on June 4, 2019.

DBRS publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

INTRODUCTION
A home equity line of credit (HELOC) is a line of credit secured by equity in an underlying residential property. HELOCs have a draw or revolving period during which a borrower can borrow funds up to a credit limit and is typically only required to make interest payments on the outstanding balance during such draw period. Once the draw period ends, the loan will begin to amortize principal over the remaining life, usually ten years to 20 years, or the borrower may be required to make a lump-sum balloon payment.

There were some HELOC securitizations issued before the financial crisis. Post-crisis, HELOC loans have been originated but substantially remained on banks’ balance sheets instead of being securitized in the secondary market.

The DBRS HELOC module estimates the probability of a first- or second-lien HELOC loan becoming 180 days delinquent within two years (D180). The two-year D180 score is then used in the default estimation process, which calculates the probability of loan default on a monthly basis using the existing RMBS Insight 1.3 D180-to-Default Model. For loss severity estimation, the existing RMBS Insight 1.3 recovery module is used.

In the application of this Methodology, it is typically assumed that HELOC borrowers will withdraw the maximum available credit line, and the equity in their property will be measured considering this fact. However, considerations may be made for seasoned products with sufficient performance and draw history or other mitigating product attributes.

DATA AND SEGMENTATION
DBRS sourced historical data from Black Knight, which has approximately 14.7 million HELOCs originated between 1968 and 2018, with monthly performance beginning in mid-2005. Home price data was also sourced from Black Knight. A representative sample of the data was used to construct the HELOC module.

The HELOC module consists of four separate components. The primary segmentation separates loans into newly originated and seasoned data sets. For seasoned loans, the data is further segmented by current delinquency status. At higher delinquency levels, fewer explanatory factors are relevant, and lower weight is applied to origination variables (e.g., FICO at origination, documentation type, etc.).

SPECIFICATION
The HELOC module specification is consistent with the D180 module specification applied to other RMBS asset types. The module is separated into three key stages:

(1) An initial scoring component estimating the likelihood of a loan becoming D180 within two years from origination. Variables such as the combined loan-to-value (CLTV) ratio and credit score are key drivers of this output.

(2) A second-stage regression uses the origination score as a driver to predict performance for seasoned loans. Additional performance variables, such as payment strings, are introduced in this step.

(3) A timing-based transition component that creates a CDR vector for each loan, using the loan’s age, the forecast period and the stage-two results as drivers. The transition framework is shared across all products, while the first two scoring components are independent by product type.

ORIGINATION AND SEASONED FACTORS
In the Methodology, DBRS lists the odds ratios for the variables in the four HELOC D180 origination and seasoned loan modules. These variables include FICO, CLTV, balloon, loan terms, origination channel, property type, documentation type for the origination module, property value decline, the balance ratio (or utilization rate), loan age and 24-month payment histories and behaviors for the seasoned loan module.

In particular, the balance ratio for a HELOC is the utilization rate that equates to the borrower’s current drawn amount over their credit limit at an as-of date. This concept is implemented into a pair of variables that captures non-linearities in the D180 response. The first variable is a continuous variable across the spectrum of utilization rates between 0% and 100%, while the second is an additional penalty applied only to HELOC loans with utilization rates above 90%. This second variable reflects the additional risks borne by borrowers who have drawn near their full amounts, including their reduced ability to access additional credit in the event of financial stress.

IMPACT ANALYSIS AND MATERIALITY
There are six DBRS-rated securitizations containing HELOC loans that range from 2% to 12% of the current principal balance of the respective pools. One is a pre-crisis legacy transaction that had already incurred writedowns on the sole remaining bond. The rest are seasoned re-performing transactions in which the HELOC credit lines are substantially all closed or frozen. Given the lack of HELOC features and data reporting, these loans are not applicable to be analyzed under the HELOC Appendix.

Accordingly, no rating impact analysis is necessary or has been performed on these outstanding transactions, and as such, DBRS does not expect any outstanding ratings to be impacted by the new HELOC Appendix.

The HELOC Appendix addresses the analytics of HELOCs only and does not impact any other asset types covered in the Methodology.

Notes:
DBRS methodologies are publicly available on its website www.dbrs.com under Methodologies & Criteria.

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