DBRS Publishes U.K. Addendum to European RMBS Insight Methodology

DBRS Ratings Limited (DBRS) has today published its “European RMBS Insight – U.K. Addendum” (the U.K. Addendum) methodology.

Publication of the U.K. Addendum follows the conclusion of the Request for Comment period, which began on 19 September 2016. Comments received during the Request for Comment period, as well as DBRS responses, have been published to the DBRS website. These comments and responses can be located under Related Research to the right of the screen. No material changes were made to the final methodology as a result of the comments received during the Request for Comment period.

The U.K. Addendum, together with the European RMBS Insight Methodology (the Methodology, originally published 17 May 2016), effective today, supersede the Master European Residential Mortgage-Backed Securities Methodology and Jurisdictional Addenda published in August 2016 for DBRS ratings assigned to U.K. residential mortgage-backed securities (RMBS) and U.K. covered bonds.

Application of the Methodology with the U.K. Addendum to the analysis of U.K. residential mortgages is deemed a material change as the Methodology introduces a new proprietary default model (European RMBS Insight Model or the Model) to forecast the expected defaults and losses of portfolios of European residential mortgages. The Model combines a loan scoring approach and dynamic delinquency migration matrices to calculate loan-level defaults and losses. Loan scoring models and dynamic delinquency migration matrices are developed using jurisdictional specific data on loans, borrowers and collateral types. In addition, the European RMBS Insight Model uses a home price model to generate market value declines (MVDs).

The U.K. Addendum is the second jurisdictional addendum published for the Methodology. Analysis of U.K. residential mortgages per the U.K. Addendum includes indexation of the underlying property values for the both the default and losses. The U.K. Addendum details the U.K. Mortgage Scoring Model (U.K. MSM), which was constructed using logistic regression with 27 parameters from 14 variables determined to assess the relative credit risk U.K. residential mortgages. The U.K. MSM includes variables to assess the relative risk of the three primary mortgage types observed in the U.K. market (prime, buy-to-let and non-conforming).

In addition, 12 risk segments were estimated based on scoring of the universe of eligible loans (per defined DBRS criteria) used to construct the U.K. MSM with a delinquency migration matrix estimated for each risk segment based on the observed roll rates. Rating scenario MVDs are determined for each of the 12 regions of the United Kingdom (and the national level) using the non-seasonally adjusted Nationwide House Price Index to calculate losses. Although no material changes were made to the final methodology following the Request for Comment period, the Outer South East region was reclassified as not volatile and not overheated for the purpose calculating MVDs within that region using the house price model.

DBRS currently rates 38 classes of notes across 14 U.K. RMBS transactions. The expected impact of the adoption of the Methodology on outstanding U.K. RMBS is expected to be neutral to positive. Positive rating actions are expected to be concentrated in some but not all of the subordinate tranches of DBRS-rated transactions. DBRS expects to publish the relevant rating actions in the near term.

Notes:
DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.

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