Morningstar DBRS Requests Comments on Proposed Changes to Common RMBS Rating Methodology, European RMBS Insight Methodology, and Related Model

Morningstar DBRS is requesting comments on the proposed update to its "Common RMBS Rating Methodology", its "European RMBS Insight Methodology" (the Insight Methodology), and European RMBS Insight Model (v. 10.2.0.0), which may, upon the close of the request for comment period, supersede the versions published on 4 February 2025 and 8 May 2025, respectively.

Morningstar DBRS is proposing to revise the minimum credit rating level dependent loss-given default (LGD) applicable for mortgage loans across all seven jurisdictions covered by the Insight Methodology: the UK, Netherlands, Ireland, Spain, Italy, France, and Portugal. The proposed minimum LGD approach will also apply to the "Common RMBS Rating Methodology". The "Common RMBS Rating Methodology" is applied to mortgage portfolios in jurisdictions globally not covered by a specific country methodology or addendum.

Instead of having a credit rating-dependent fixed minimum loan-level LGD, the proposed approach takes a more statistical approach dependent on the weighted-average portfolio loan-to-value ratio (LTV) at each point in the time as well as the market value decline (MVD), distressed sale discount, and foreclosure-cost assumption applicable for that portfolio. The proposed approach is statistically more robust than the current approach of assuming fixed loan-level LGD floors.

Morningstar DBRS deems this to be a material change affecting the "Common RMBS Rating Methodology", the Insight Methodology, and the European RMBS Insight Model.

The proposed change is likely to affect the loss severities and, consequently, the loss rates assumed for mortgage portfolios across the seven jurisdictions covered by the Insight Methodology, especially for low LTV portfolios. The change will also apply to all mortgage portfolios analysed with the "Common RMBS Rating Methodology". On average for the affected portfolios this will lead to lower loss severities and, hence, loss levels. However, the impact will not be uniform, including for some deals where the proposed approach could also result in slightly higher LGD.

Morningstar DBRS currently rates 529 notes across 146 RMBS transactions in seven jurisdictions covered by the Insight Methodology and five notes across four RMBS transactions rated with the "Common RMBS Rating Methodology". If the proposed methodologies were adopted, they are expected to have little or no expected impact on most outstanding credit ratings, with the potential for a two-notch impact, or more, on fewer than 10% of outstanding transactions. Overall, Morningstar DBRS estimates the impact to be mostly positive, but some transactions could be negatively affected as well.

Morningstar DBRS has also analysed the 19 covered bond programs which utilise the MVD and LGD floors in these affected methodologies and no credit rating impact is expected on the covered bond programs.

Comments should be received on or before 13 June 2025. 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.