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

Morningstar DBRS is requesting comments on the proposed new “European RMBS Insight: French Addendum” (the French Addendum) of the “European RMBS Insight Methodology” (the Methodology) and corresponding European RMBS Insight Model (the Model). The Methodology and the Model may supersede the French Residential Mortgage Addendum to the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda” published on 7 March 2024. As a result, Morningstar DBRS is also proposing to withdraw the “Master European Residential Mortgage-Backed Securities Rating Methodology and Jurisdictional Addenda”.

The French Addendum and Model present the criteria for which French residential mortgage-backed securities (RMBS) and French 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 French Addendum, will also be used for rating French small and medium-size enterprises (SME) and nonperforming loan (NPL) transactions.

The French Addendum is the seventh jurisdictional addendum to be published for the Methodology. The proposed application of the Methodology to the analysis of French 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 French 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 European RMBS Insight Model uses a house price approach to generate MVDs.

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

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

The French MVDs are estimated at the national level and for 13 reported in the House Price Tool for which the Institut national de la statistique et des études économiques (INSEE) provide nominal house price data. Real house prices were calculated using the harmonised CPI data with Q2 2021 as the base year and indexed up to December 2023. MVDs are applied to the updated property value to discount the sale price of a property to calculate periodic losses.

The DSD assumption for France is typically 25%. DSDs are applied to the expected property value after applying the MVD and are meant to address a property sale in a liquidation scenario.

As the use of institutional guarantees (caution) as security for a home loan is common in the French market, Morningstar DBRS' analytical approach is to give credit to proceeds from the caution provider. This benefit is dependent on both the rating of the caution provider and the stressed rating level being analysed for the assets. Furthermore, Morningstar DBRS also proposes to introduce rescission rates across different rating categories, which address the lender’s claim rejection and account for falsified documents provided by the borrower at origination of the loan and uncaught by the lender's risk department. Higher rescission rates effectively reduce the benefit of the guarantee as higher level of claims are denied. Morningstar DBRS proposes to apply a base rescission rate of 5% (based on historical data) in the BBB and below rating scenarios with a 5% increase for each higher rating scenario leading to a 20% rescission rate in the AAA rating scenario. A different base rescission rate may be applied if supported by data.

Morningstar DBRS currently rates 11 classes of notes across seven French RMBS transactions. Overall, the impact of the adoption of the French Addendum to the Methodology is expected to lead to lower expected losses across all French RMBS transactions and is expected to have a positive impact on some French RMBS ratings.

There are no outstanding ratings on French Covered Bonds backed by home loans, French NPL, or French SME transactions, and hence there is no rating impact.

Comments should be received on or before 20 May 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 dbrs.morningstar.com under Methodologies & Criteria.

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