DBRS Morningstar Publishes Final Common RMBS Rating Methodology

DBRS Morningstar finalised its new “Common RMBS Rating Methodology” (the Methodology).

This Methodology outlines DBRS Morningstar's approach to analysing the credit risk of residential mortgage portfolios (including those securing covered bonds or pass-through instruments backed by residential mortgage portfolios) in markets that are not covered by a specific DBRS Morningstar rating methodology. The approach determines an expected level of lifetime defaults and losses in such mortgage portfolios, and an analytical tool is used to determine the probabilities of default (PD) and losses for all rating categories. Calculation of market value declines is based on a simulation of home price changes based on the national or – if available – regional historical house price index series.

The Methodology is applicable to pools composed of performing, local currency-denominated residential mortgage portfolios that, in DBRS Morningstar's opinion, have standard features in the context of the jurisdiction in which they have been originated. While nonperforming loans are outside of the scope of the methodology, a limited amount of loans in arrears would not preclude DBRS Morningstar from rating a proposed issuance.

The estimation of the default assumption follows a two-step approach.

The first step focuses on jurisdiction-specific factors, namely the sovereign rating, the mortgage market, and the legal framework, to determine a Jurisdiction Score, which is then associated with a minimum Jurisdiction PD Floor to be applied to residential mortgage portfolios in that jurisdiction.

The second step sets the lifetime level of default expected for the analysed portfolio (the Expected Portfolio PD). This will typically be equal to or higher than the Jurisdiction PD Floor and reflects the lender's historical performance data, the collateral pool composition, and the quality of origination and servicing.

Rating scenario default rates are estimated assuming the distribution of potential portfolio defaults, which is a Vasicek distribution. The distribution is estimated based on two variables: the Expected Portfolio PD and the asset correlation assumption.

As regards the loss given default (LGD) analysis, DBRS Morningstar uses a stochastic process to generate base house prices and market value declines (MVD) rates for each rating scenario. These are jurisdiction-specific and typically based on published residential property price data. The analysis is based on a binary lattice stochastic process that estimates house prices as well as their distributions, which can then be used to generate MVD assumptions.

Other assumptions needed to set the LGD levels (e.g. distressed sale discount, foreclosure costs) are estimated after analysing the lender-level and jurisdiction-wide available data.

The cash flows of the transactions are stressed for different level of prepayments (slow, mid, and fast) and two default timing patterns (front-loaded and back-loaded).

Each rating assigned using the Methodology is reviewed in accordance with DBRS Morningstar’s Structured Finance Ratings Surveillance Global Policy on www.dbrsmorningstar.com. DBRS Morningstar’s review may consist of analysing performance trends, comparing actual performance with initial expectations, and forecasting collateral behaviour and its impact on the rated securities.

DBRS Morningstar currently does not rate any transactions in jurisdictions currently covered under this new Methodology.

No comments were received during the request for comment period for the Common RMBS Methodology.

All comments received during the request for comment period have been published to the DBRS
Morningstar website, except in cases where confidentiality is requested by the respondent.

Notes:
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.

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.

DBRS Morningstar methodologies are publicly available on its website www.dbrsmorningstar.com under Methodologies & Criteria.

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