DBRS Morningstar Publishes Final Methodology on European RMBS Insight: Irish Addendum and Withdraws Irish Residential Mortgage Addendum to Master European RMBS Rating Methodology

DBRS Morningstar finalised its “European RMBS Insight: Irish Addendum” (the Irish Addendum) to the “European RMBS Insight Methodology” (the Methodology) and corresponding European RMBS Insight Model (the Model).

The Irish Addendum and Model present the criteria for which Irish residential mortgage-backed securities (RMBS) and covered bonds ratings are assigned and/or monitored. The distressed sale discount (DSD), market value decline (MVD), and foreclosure cost assumptions, which are part of the Irish Addendum, will also be used for rating Irish small and medium-size enterprises (SME) and nonperforming loan (NPL) transactions.

The Methodology and the Model supersede the “Irish Residential Mortgage Addendum” to the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” published on 28 November 2022 and are effective as of 5 June 2023. As a result, DBRS Morningstar withdraws its “Irish Residential Mortgage Addendum” to the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.

The Irish Addendum is the fifth jurisdictional addendum to be published for the Methodology. The application of the Methodology to the analysis of Irish residential mortgages is deemed a material change as the Methodology introduces a new proprietary default model to forecast the expected default and losses of portfolios of Irish residential mortgages. The Model combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan-level defaults and losses. The loan scoring approach and dynamic delinquency migration matrices are developed using jurisdictional specific data on loan, borrowers, and collateral types. In addition, the Model uses a house price approach to generate MVDs.

The Irish Addendum outlines the country specific aspects of the Methodology to estimate defaults and losses for Irish residential mortgage loans. It is applied with the Methodology for rating European RMBS, covered bonds, and other transactions linked to residential mortgage assets located in Ireland.
Analysis of the Irish residential mortgages per the Irish Addendum includes indexation of the underlying property values up to December 2022. The Irish Addendum details the Irish Loan Scoring Approach (Irish LSA), which was constructed using logistic regression with loan-level data from the European DataWarehouse (EDW) to assess the relative credit risk of Irish residential mortgages. Based on scoring of the universe of eligible loans (per defined DBRS Morningstar criteria), nine risk segments were used to construct the Irish LSA for non-restructured loans and six risk segments were used to construct the Irish LSA for restructured loans with a delinquency migration matrix estimated for each risk segment based on the observed roll rates.

Two DSDs have been estimated for Ireland for loans where the property valuation took place either before or after 2013. The DSD assumption for valuation dates before or in 2013 is typically 35% while, for valuation dates after 2013, it is typically 20%. Distressed sale discount estimates were derived from proprietary data as well as from the EDW.

The Irish MVDs are estimated at the national level and for six regions reported in the House Price Tool provided by the Central Statistics Office of Ireland (CSO). The CSO Index covers quarterly data since 2007 for each of the Irish regions. Real house prices were calculated using the harmonised CPI data with Q2 2018 as the base year and indexed up to December 2022. MVDs are applied to the updated property value to discount the sale price of a property to calculate periodic losses.

DBRS Morningstar currently rates 109 classes of notes across 21 Irish RMBS transactions. Overall, the impact of the adoption of the Irish Addendum to the Methodology on Irish RMBS ratings is moderately positive for some transactions with loans originated after 2015; however, some transactions, including loans that were originated before 2010, might also be negatively affected.

DBRS Morningstar currently rates 12 classes of notes across five Irish NPL transactions using the MVDs as per the Irish Residential Mortgage Addendum of the Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda. The impact of the adoption of the Irish Addendum to the Methodology on Irish NPL transactions is overall positive, but no rating actions are expected as a result.

There are no outstanding ratings on Irish covered bonds or Irish SME transactions and, hence, there is no rating impact in these areas.

Publication of the methodology follows the conclusion of the request for comment (RFC) period that began on 27 April 2023. DBRS Morningstar received no comments during the request for comment period. All comments received during the RFC 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/396929.

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 [email protected].