Morningstar DBRS Requests Comments on Proposed Updates to European RMBS Insight: Dutch Addendum

Morningstar DBRS is requesting comments on the proposed updates to the "European RMBS Insight: Dutch Addendum" methodology (the Methodology), which may, upon the close of the Request for Comment period, supersede the version published on 11 March 2024. This methodology presents the criteria for which Dutch residential mortgage-backed securities (RMBS) and Dutch covered bonds ratings are assigned and/or monitored.

Morningstar DBRS is proposing to update the Methodology to include a revised Dutch Loan Scoring Approach (Dutch LSA), updated house price data, market value declines (MVDs), and distressed sale discounts (DSDs), as well as revised rescission rates.

More specifically, the Methodology details the Dutch LSA, which was constructed using logistic regression with loan-level data from the European DataWarehouse (EDW) to assess the relative credit risk of Dutch residential mortgages. Based on scoring of the universe of eligible loans (as per Morningstar DBRS criteria), seven risk segments, instead of 12 previously, were used to construct the Dutch LSA with a delinquency migration matrix estimated for each risk segment based on the observed roll rates. Within the Dutch LSA, the variables have been reassessed; some of them have been removed whereas others have been amended or added (please refer to Exhibit 1 of the new proposed Methodology for more details).

The Dutch Delinquency Migration Matrix (DMM) has also been updated using the same dataset employed to revise the Dutch LSA, by computing the average roll rates observed in the loan-level data from Q1 2013 to Q4 2023. The Dutch DMM is now based on seven risk segments. The DMM currently in use was developed considering mortgages backing master trust transactions that were more than one month in arrears as part of the defaulted balance calculation if they were subsequently repurchased or redeemed. Instead, in the proposed model fitting, a 40% random sample of those loans would contribute to the defaulted balance. The rationale for the 40% assumption is based on the observed default rate of mortgages more than one month in arrears.

In addition, Morningstar DBRS is proposing to update its house price indexation and MVDs for the Netherlands' three largest cities, and the 12 provinces for which Statistics Netherlands provides quarterly nominal house price data. Real house prices were calculated using the harmonised CPI data with Q1 2020 as the base year and indexed up to Q4 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 Dutch residential mortgages has been revised to 25% from 20% previously. DSD estimates were derived from proprietary data as well as from the EDW.

Morningstar DBRS also updated the National Hypotheek Garantie (NHG) rescission rates across different rating categories, which address the lender's claim rejection and account for potential noncompliance with the NHG terms. Higher rescission rates effectively reduce the amount of the NHG guarantee. Morningstar DBRS analysed more than 28,000 cases of submitted claims from multiple lenders between Q3 2009 and Q3 2023 where a loss to the NHG was claimed. The historical mean rescission rate observed on this sample was 15.8%. Morningstar DBRS proposes to apply a base rescission rate of 15% in the BBB and below rating scenarios with a 5% increase for each higher rating scenario, leading to a 30% rescission rate in the AAA rating scenario. The proposed rescission rates are 10 percentage points lower than the current ones.

Morningstar DBRS currently rates 83 classes of notes across 30 Dutch RMBS transactions. Overall, the proposed methodology updates could lead to lower expected losses for some transactions and Morningstar DBRS expects the impact of the updated Dutch Addendum to the Methodology on Dutch RMBS ratings to be positive for a small number of transactions.

There are no outstanding Morningstar DBRS ratings on Dutch covered bonds, small and medium-size enterprises, collateralised loan obligations, or nonperforming loan securitisations. Hence, there is no rating impact.

Comments should be received on or before 19 August 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.