DBRS Morningstar Places Five U.S. RMBS Securities Under Review with Negative Implications

On April 13, 2020, and May 13, 2020, DBRS Morningstar published commentaries on the U.S. residential mortgage-backed security (RMBS) sector titled “Coronavirus Disease Fallout and the Credit Risk Exposure Mapping of U.S. RMBS Sectors” and “Coronavirus Disease Implications for GSE CRT Deals,” respectively. In a commentary titled “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, DBRS Morningstar provided an update on how its scenarios and views on the coronavirus have evolved since its original commentary dated April 16, 2020. DBRS Morningstar’s moderate scenario now reflects recent economic data and assumes that a full recovery takes somewhat longer. This implies lower GDP growth for 2020, higher GDP growth for 2021 (as a larger proportion of lost output is made up in 2021 instead of Q3 and Q4 2020), and higher unemployment in 2020 carrying through to 2021.

DBRS Morningstar’s rating actions are based on the following analytical considerations:

-- Key performance measures as reflected in month-over-month changes in delinquency (including forbearance) percentages, credit enhancement (CE) increases since deal inception, and the CE levels relative to the 30+-day delinquencies.

-- Offset of mortgage relief initiatives via direct-to-consumer economic aid, mortgage payment assistance, and foreclosure suspension directives.

-- Higher unemployment rates and more conservative home price assumptions.

NON-QM
In the Non-QM asset class, DBRS Morningstar generally believes that loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value (LTV) borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with prior credit events have exhibited difficulties in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Self-employed borrowers are potentially exposed to more volatile income sources, which could lead to reduced cash flows generated from their businesses. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and therefore slower prepayments. In addition, certain pools with elevated geographic concentrations in densely populated urban metropolitan statistical areas may experience additional stress from extended lockdown periods and the slowdown of the economy.

RPL
In the RPL asset class, DBRS Morningstar generally believes that loans that were previously delinquent, recently modified, or have higher updated LTVs may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

The rating actions are a result of DBRS Morningstar’s application of the “U.S. RMBS Surveillance Methodology” published on February 21, 2020.

When DBRS Morningstar places a rating Under Review with Negative Implications, DBRS Morningstar seeks to complete its assessment and remove the rating from this status as soon as appropriate. Upon the resolution of the Under Review status, DBRS Morningstar may confirm or downgrade the ratings on the affected classes.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodologies are the U.S. RMBS Surveillance Methodology (February 21, 2020) and RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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

For more information on these credits or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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