DBRS Morningstar Finalizes New Methodology and Two New Exhibits for Residential Transition Loans

DBRS Morningstar finalized a new appendix and two new exhibits for three residential mortgage-backed securities (RMBS) methodologies as follows:

-- “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” (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)
-- “Operational Risk Assessment for U.S. RMBS Servicers” (Exhibit V—Sample Operational Risk Questions for U.S. Residential Transition Loan Servicers)

The new appendix and exhibits present the criteria for which the new U.S. residential transition loan asset class ratings are assigned and/or monitored.

The “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” supersedes the prior version published on August 9, 2023, and is effective as of August 31, 2023. The “Operational Risk Assessment for U.S. RMBS Originators” and “Operational Risk Assessment for U.S. RMBS Servicers” methodologies supersede the prior versions published on July 17, 2023, and are effective as of August 31, 2023.

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

The finalization of these methodologies follows the conclusion of the request for comment period that began on July 11, 2023. DBRS Morningstar received several comments related to the treatment of Bridge Only (BO) loans (confidentiality requested by the respondents) during the request for comment period. The comments indicated certain BO loans may be on properties that are fully or substantially rehabilitated and ready to be sold or leased at the time of origination (i.e., BO – Ready to Sell/Lease) and therefore may pose lower credit risk than the traditional BO loans. In the final methodology, DBRS Morningstar clarified the two types of BO loans and indicated that BO – Ready to Sell/Lease loans may be viewed more favorably to the extent adequate and better performance histories are presented. The comments were deemed to have no material impact on the methodology.

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].