DBRS Morningstar Finalizes Provisional Ratings on Bellemeade Re 2022-2 Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the Mortgage Insurance-Linked Notes, Series 2022-2 (the Notes) issued by Bellemeade Re 2022-2 Ltd. (BMIR 2022-2 or the Issuer):

-- $52.9 million Class M-1A at BBB (high) (sf)
-- $105.0 million Class M-1B at BB (high) (sf)
-- $21.6 million Class M-2 at BB (low) (sf)
-- $21.6 million Class B-1 at B (high) (sf)

The BBB (high) (sf), BB (high) (sf), BB (low) (sf), and B (high) (sf) ratings reflect 5.55%, 3.40%, 2.95%, and 2.50% of credit enhancement, respectively.

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

BMIR 2022-2 is Arch Mortgage Insurance Company’s (Arch MI) and United Guaranty Residential Insurance Company’s (UGRIC; collectively, the ceding insurers) 17th rated mortgage insurance (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 152,768 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 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 a payment forbearance plan. The mortgage loans have MI policies effective in or after January 2021 and in or before June 2022.

In this transaction, there could be loans located in counties designated by the Federal Emergency Management Agency as having been affected by a non-Coronavirus Disease (COVID-19)-related natural disaster. MI 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 guidelines (see the Representations and Warranties section in the related rating report for more detail). 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 at least Aa-mf by Moody's 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 MI-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 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. 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 is 7.50%. The delinquency test will be satisfied if the three-month average of 60 plus days delinquency percentage is below 75% of the subordinate percentage (see the Cash Flow Structure and Features section in the related rating report for more detail).

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 rating report and/or offering circular for more details.

The Notes are scheduled to mature on September 27, 2032, 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. Additionally, there is a provision for the ceding insurer to issue a tender offer to reduce all or a portion of the outstanding Notes.

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 IMPACT
The coronavirus 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 forbearances, 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, driving 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, 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: September 2022 Update,” dated September 19, 2022.

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 rating report.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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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