DBRS Morningstar Finalizes Provisional Ratings on Bellemeade Re 2021-3 Ltd.

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Mortgage Insurance-Linked Notes, Series 2021-3 (the Notes) issued by Bellemeade Re 2021-3 Ltd. (BMIR 2021-3 or the Issuer):

-- $104.9 million Class M-1A at A (low) (sf)
-- $64.3 million Class M-1B at BBB (high) (sf)
-- $81.4 million Class M-1C at BBB (low) (sf)
-- $115.3 million Class M-2 at BB (low) (sf)
-- $19.0 million Class B-1 at B (high) (sf)

The A (low) (sf), BBB (high) (sf), BBB (low) (sf), BB (low) (sf), and B (high) (sf) ratings reflect 7.00%, 5.85%, 4.40%, 2.55%, and 2.25% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

BMIR 2021-3 is Arch Mortgage Insurance Company’s (Arch MI's) and United Guaranty Residential Insurance Company’s (UGRIC's; collectively the ceding insurer) 15th rated MI-linked note transaction. The Notes are backed by reinsurance premiums, eligible investments, and related account investment earnings, in each case relating to a pool of MI policies linked to residential loans. The Notes are exposed to the risk arising from losses the ceding insurer pays to settle claims on the underlying MI policies. As of the cut-off date, the pool of insured mortgage loans consists of 93,138 fully amortizing first-lien fixed- and variable-rate mortgages. They all have been underwritten to a full documentation standard, have original loan-to-value ratios (LTVs) less than or equal to 100%, and have never been reported to the ceding insurer as 60 or more days delinquent. As of the Cut-Off Date, these loans have not been reported to be in payment forbearance plan. The mortgage loans have MI policies effective on or after January 2020 and on or before June 2021.

In this transaction, there could be loans located in counties designated by the Federal Emergency Management Agency (FEMA) as having been affected by a non-coronavirus-related natural disaster. Mortgage insurance policies generally exclude physical damage in excess of $5,000. None of the mortgage loans are likely to be dropped from the transaction. Please reference the offering circular for additional details.

On March 1, 2020, a new master policy was introduced to conform to government-sponsored enterprises’ revised rescission relief principles under the Private Mortgage Insurer Eligibility Requirements (PMIERs) guidelines (see the Representations and Warranties section in the related report for more details). Approximately 99.97% of the mortgage loans (by Cut-Off Date) are insured under the new master policy.

On the Closing Date, the Issuer will enter into the Reinsurance Agreement with the ceding insurer. As per the agreement, the ceding insurer will get protection for the funded portion of the MI losses. In exchange for this protection, the ceding insurer will make premium payments related to the underlying insured mortgage loans to the Issuer.

The Issuer is expected to use the proceeds from the sale of the Notes to purchase certain eligible investments that will be held in the reinsurance trust account. The eligible investments are restricted to AAA or equivalent rated U.S. Treasury money-market funds and securities. Unlike other residential mortgage-backed security (RMBS) transactions, cash flow from the underlying loans will not be used to make any payments; rather, in mortgage insurance-linked Notes (MILN) transactions, a portion of the eligible investments held in the reinsurance trust account will be liquidated to make principal payments to the noteholders and to make loss payments to the ceding insurer when claims are settled with respect to the MI policy.

The Issuer will use the investment earnings on the eligible investments, together with the ceding insurer’s premium payments, to pay interest to the noteholders.

Notable Changes
This transaction incorporates below notable changes:
1.Senior Coverage Level A will be split into Coverage Level A-1 and Coverage Level A-2. Class A-2 Notes, corresponding to Coverage Level A-2, will be offered. Class A-2 Notes will be locked out for principal payments until certain conditions are met. This may lead to some erosion of credit support for Class A-2 Notes in certain scenarios where subordinate Notes receive principal payment while Class A-2 Notes are locked out.
2.The threshold for the delinquency test (one of the performance tests), that locks out subordinate Notes from receiving principal payment, is reduced to 60% of the subordinate percentage, instead of 75% in prior deals.

The calculation of principal payments to the Notes will be based on the reduction in aggregate exposed principal balance on the underlying MI policy that is allocated to the Notes. Class A-2 Notes will be locked out from receiving principal payments until the following conditions are met:
1.Payment Date is on or after April 2025,
2.A-1 credit enhancement is at least 10.0%, and
3.three-month average of 60+ days delinquency percentage is below 75% of the subordinate percentage.

The subordinate Notes will receive their pro rata share of available principal funds if the minimum credit enhancement test and the delinquency test are satisfied. The minimum credit enhancement test has been set to fail at the Closing Date, thus locking out the rated classes from initially receiving any principal payments until the subordinate percentage grows to 10.00% from 9.00%. The delinquency test will be satisfied if the three-month average of 60+ days delinquency percentage is below 60% of the subordinate percentage (see the Cash Flow Structure and Features section of the related report for more details).

The coupon rates for the Notes are based on the Secured Overnight Financing Rate (SOFR). There are replacement provisions in place in the event that SOFR is no longer available, please see the Offering Circular for more details. DBRS Morningstar did not run interest rate stresses for this transaction, as the interest is not linked to the performance of the underlying loans. Instead, interest payments are funded via (1) premium payments that the ceding insurer must make under the reinsurance agreement and (2) earnings on eligible investments.

On the Closing Date, the ceding insurer will establish a cash and securities account, the premium deposit account. In case of the ceding insurer’s default in paying coverage premium payments to the Issuer, the amount available in this account will be used to make interest payments to the noteholders. The premium deposit account will not be funded at closing. The ceding insurer will make a deposit into this account up to the applicable target balance only when one of the Premium Deposit Events occur. Please refer to the related report and/or offering circular for more details.

The Notes are scheduled to mature on September 25, 2031 but will be subject to early redemption at the option of the ceding insurer (1) for a 10% clean-up call or (2) on or following the payment date in September 2027, among others. The Notes are also subject to mandatory redemption before the scheduled maturity date upon the termination of the Reinsurance Agreement.

Arch MI and UGRIC, together, act as the ceding insurers. The Bank of New York Mellon (rated AA (high) with a Stable trend by DBRS Morningstar) will act as the Indenture Trustee, Paying Agent, Note Registrar, and Reinsurance Trustee.

Coronavirus Disease (COVID-19) Impact
The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the coronavirus, DBRS Morningstar saw an increase in the delinquencies for many RMBS asset classes.

Such mortgage delinquencies were mostly in the form of forbearance, which are generally short-term periods of payment relief, that may perform differently from traditional delinquencies. At the onset of coronavirus, the option to forebear mortgage payments was widely available, droving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months, delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

For more information regarding the economic stress assumed under its baseline scenario, please see the following “DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns,” dated September 8, 2021.

The ratings reflect transactional strengths that include the following:

-- Agency-eligible loans.
-- High-quality credit and loan attributes.
-- MI termination.
-- A well-diversified pool.
-- Alignment of interest.

The transaction also includes the following challenges:

-- Counterparty exposure.
-- A weak representation and warranties framework.
-- Limited third-party due diligence.
-- Eligible investment losses.

The full description of the strengths, challenges, and mitigating factors is detailed in the related report.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings

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.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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