DBRS Morningstar Requests Comments on Proposed New Methodology and Two New Exhibits for Home Equity Agreements

DBRS Morningstar is requesting comments on the following methodologies (the RFC Methodologies), which present the criteria for which U.S. home equity agreements (HEA) ratings are assigned and/or monitored:

-- Rating and Monitoring U.S. Reverse Mortgage Securitizations (Appendix 3 – Home Equity Agreement (HEA) Methodology)
-- Operational Risk Assessment for U.S. RMBS Originators (Exhibit V — Sample Operational Risk Questions for U.S. Home Equity Agreements Originators)
-- Operational Risk Assessment for U.S. RMBS Servicers (Exhibit IV — Sample Operational Risk Questions for U.S. Home Equity Agreements Servicers)

Upon the close of the Request for Comment period, the RFC methodologies may supersede the previous versions published on November 23, 2022.

HEA METHODOLOGY
The proposed “Appendix 3 – Home Equity Agreement (HEA) Methodology” (the Proposed HEA Methodology) of the Rating and Monitoring U.S. Reverse Mortgage (RM) Securitizations methodology (the RM Methodology) presents the principal asset class methodology that DBRS Morningstar intends to apply to assign new credit ratings and monitor outstanding credit ratings in the HEA asset class following the finalization of the Request for Comment period. The Proposed HEA Methodology provides a discussion of the key analytical and credit considerations, collateral quality and metrics, legal and regulatory considerations, and cash flow analysis applicable to DBRS Morningstar’s analysis of HEA asset class transactions.

The Proposed HEA Methodology has commonalities with the RM Methodology, including (1) interest rate stresses; (2) foreclosure cost and timeline calculations; (3) home price decline stresses; and (4) mortality event triggers.

The Proposed HEA Methodology differs from the RM Methodology, with assumptions calibrated for HEA, including custom-designed (1) prepayment ramps and (2) default curves. Another noteworthy difference is that, unlike RM loans, which accrue interest, the value of an HEA contract DBRS Morningstar computes is a function of property valuation.

HEA ORIGINATORS EXHIBIT AND HEA SERVICERS EXHIBIT
Please refer to Exhibit V — Sample Operational Risk Questions for U.S. Home Equity Agreements Originators in the Operational Risk Assessment for U.S. RMBS Originators methodology and to Exhibit IV — Sample Operational Risk Questions for U.S. Home Equity Agreements Servicers in the Operational Risk Assessment for U.S. RMBS Servicers methodology, which formalize the sample list of questions DBRS Morningstar expects to use in the operational risk reviews of originators and servicers operating in the HEA asset class upon the finalization of the RFC Methodologies.

The criteria for which DBRS Morningstar assigns and/or monitors U.S. RM ratings remain unchanged from the existing Rating and Monitoring U.S. Reverse Mortgage Securitizations methodology. The outstanding credit ratings in the RM asset class are not affected by this additional new methodology. Comments should be received on or before July 12, 2023. Please submit your comments to the following email address: [email protected]

DBRS Morningstar publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

Notes:
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.

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].