Morningstar DBRS Requests Comments on Proposed European RMBS Insight: Portuguese Addendum; to Withdraw the Portuguese Residential Mortgage Addendum to the Master European RMBS Rating Methodology

Morningstar DBRS is requesting comments on the proposed new “European RMBS Insight: Portuguese Addendum” (the Portuguese Addendum) of the “European RMBS Insight Methodology” (the Methodology) and corresponding European RMBS Insight Model (the Model). This methodology and predictive model present the criteria for which Portuguese 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 Portuguese Addendum, will also be used for rating Portuguese nonperforming loan (NPL) transactions.

The Methodology and the Model may supersede the Portuguese Residential Mortgage Addendum to the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” published on 13 September 2023. As a result, Morningstar DBRS is also proposing to withdraw its Portuguese Residential Mortgage Addendum to the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.

The Portuguese Addendum is the sixth jurisdictional addendum to be published for the Methodology. The proposed application of the Methodology to the analysis of Portuguese 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 Portuguese residential mortgages. The Model combines a loan scoring approach and delinquency migration matrices to calculate loan-level defaults and losses. The loan scoring approach and delinquency migration matrices are developed using jurisdictional specific data on loan, borrowers, and collateral types. In addition, the European RMBS Insight Model uses a house price approach to generate MVDs.

The Portuguese Addendum outlines the country-specific aspects of the Methodology to estimate defaults and losses for Portuguese residential mortgage loans. It will be applied with the Methodology for rating European RMBS, covered bonds, and other transactions linked to residential mortgage assets located in Portugal.

Analysis of the Portuguese residential mortgages per the Portuguese Addendum includes indexation of the underlying property values up to March 2023. The Portuguese Addendum details the Portuguese Loan Scoring Approach (Portuguese LSA), which was constructed using a logistic regression with loan-level data from the European DataWarehouse (EDW) to assess the relative credit risk of Portuguese residential mortgages. Based on scoring of the universe of eligible loans (as defined by Morningstar DBRS criteria), nine risk segments were used to construct the Portuguese LSA with a delinquency migration matrix estimated for each risk segment based on the observed roll rates.

The DSD assumption is typically 25%. Distressed sale discount estimates were derived from proprietary data as well as from the EDW.

The Portuguese MVDs are estimated at the national level and for 23 regions reported in the House Price Tool provided by Confidencial Imobiliário (CI). The CI Index covers quarterly data since 1990 for each of the Portuguese regions. Real house prices were calculated using the harmonised CPI data with Q4 2021 as the base year and indexed up to Q1 2023. MVDs are applied to the updated property value to discount the sale price of a property to calculate periodic losses.

Morningstar DBRS currently rates 11 classes of notes across nine Portuguese RMBS transactions. Overall, the adoption of the Portuguese Addendum to the Methodology is expected to have no impact on Portuguese RMBS credit ratings.

Morningstar DBRS currently rates four Portuguese covered bonds transactions. Overall, the adoption of the Portuguese Addendum to the Methodology is expected to have no impact on Portuguese covered bonds credit ratings.

Comments should be received on or before 28 March 2024. Please submit your comments to the following email address:
sfcomments@morningstar.com

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

Notes:
Morningstar DBRS methodologies are publicly available on its website https://dbrs.morningstar.com/ under Methodologies & Criteria.

For more information on this methodology or on this industry, visit https://dbrs.morningstar.com/ or contact us at info-DBRS@morningstar.com.