DBRS Morningstar Requests Comments on Proposed Methodologies for Residential Transition Loans

DBRS Morningstar is requesting comments on the following methodologies (the RFC Methodologies), which may, upon the close of the Request for Comment period, supersede the versions published on the dates below:

-- “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” (March 3, 2023) (Appendix 10: Residential Transition Loan D180 Module)
-- “Operational Risk Assessment for U.S. RMBS Originators” (Exhibit VI—Sample Operational Risk Questions for U.S. Residential Transition Loan Originators) (November 23, 2022)
-- “Operational Risk Assessment for U.S. RMBS Servicers” (Exhibit V—Sample Operational Risk Questions for U.S. Residential Transition Loan Servicers) (November 23, 2022)

The RFC Methodologies present the criteria for which U.S. residential transition loan (RTL) ratings are assigned and/or monitored.

The proposed material changes are not expected to have ratings impact on any outstanding DBRS Morningstar-rated U.S. RMBS securities.

RTL METHODOLOGY
The proposed Appendix 10: Residential Transition Loan D180 Module of the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating 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 RTL asset class following the finalization of the Request for Comment period.

RMBS Insight Model 1.3 has been enhanced to estimate the probability of default and loss severity for the first-lien RTLs, also referred to as fix-and-flip mortgage loans. The RTL module is an analytical add-on to the RMBS Insight Model 1.3. This module estimates the probability of a first-lien RTL becoming 180 days or more delinquent (D180), foreclosure, or REO within two years (RTL D180). Next, the RTL D180 is used in the second stage of the default estimation process, which calculates the probability of loan default on a monthly basis using the existing RMBS 1.3 D180-to-Default Model. Last, the existing RMBS 1.3 recovery module is used for loss severity estimation.

The RTL D180 forecast includes all factors pertaining to traditional mortgages to account for increased risk of certain loan attributes, such as FICO score, Loan-To-Value ratio (or variations thereof as described in the appendix), as well as the applicable risk attributes unique to RTLs. Such RTL-specific factors include property liquidity ratio, borrower experience, project size, bridge only, borrower liquid reserves, and loan term extensions, as discussed in detail in the appendix.

RTL ORIGINATORS EXHIBIT AND RTL SERVICERS EXHIBIT
Please refer to Exhibit VI—Sample Operational Risk Questions for U.S. Residential Transition Loan Originators in the “Operational Risk Assessment for U.S. RMBS Originators” methodology and to Exhibit V—Sample Operational Risk Questions for U.S. Residential Transition Loan 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 RTL asset class upon the finalization of the RFC Methodologies.

Comments should be received on or before August 11, 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].