DBRS and Morningstar Credit Ratings Provide Notification on Methodology Decisions for U.S. Mortgage Servicing Rights Transactions

On July 11, 2019, Morningstar Credit Ratings, LLC (MCR) and DBRS, Inc. (DBRS; together, DBRS Morningstar) published their first announcement regarding the integration of the analytical teams focused in the U.S. structured finance market. Today’s press release is the thirty-sixth in a series to keep the market updated on analytical integration decisions and is focused on the U.S. residential mortgage-backed securities (RMBS) sector.

<a href="https://www.dbrsmorningstar.com/research/347875/" target="_blank">“DBRS and Morningstar Credit Ratings Announce Analytical Integration Process and Ratings Overlap”</a>

U.S. RMBS MORTGAGE SERVICING RIGHTS ASSET CLASS
DBRS Morningstar conducted an analysis of the U.S. RMBS Mortgage Servicing Rights (MSR) asset class and concluded that, following the notification period described herein, new engagements in this asset class will be rated and monitored by DBRS using a combination of the following methodologies (collectively, the Applicable MSR Methodologies):

(1) <a href="https://www.dbrsmorningstar.com/research/352469/" target="blank">“Rating U.S. Structured Finance Transactions”</a> (2) <a href="https://www.dbrsmorningstar.com/research/355719/" target="blank">“Legal Criteria for U.S. Structured Finance”</a>
(3) <a href="https://www.dbrsmorningstar.com/research/350802/" target="_blank">“Global Methodology for Rating Non-Bank Financial Institutions”</a>

The notification period related to the methodology selections will close on or about July 31, 2020.

The “Rating U.S Structured Finance Transactions” methodology recognizes that collections of mortgage servicing fees are generally senior to other security obligations in the cash flow waterfall, and considers the potential linkage to the MSR servicer (or guarantor) who guarantees the full repayment of principal and interest to noteholders at maturity. Such linkage may result in limitations on the MSR ratings from the guarantor’s corporate rating.

“Legal Criteria for U.S. Structured Finance,” specifically in the True Sale and Non-Consolidation sections, considers the legal separation of the MSR assets from the servicer. It further discusses limitations on the security ratings where a potential linkage is recognized to a counterparty (servicer).

The “Global Methodology for Rating Non-Bank Financial Institutions” methodology will be used to assess the corporate credit risk of the MSR servicer. This methodology also provides the basis for assessing the limitations on the MSR ratings from the servicer’s corporate rating.

MCR MSR ASSET CLASS TRANSACTIONS PREVIOUSLY PLACED UNDER REVIEW NEGATIVE
On June 4, 2020, MCR downgraded 19 classes in three NRZ MSR-Collateralized Notes transactions as a result of applying adjusted assumptions related to Coronavirus Disease (COVID-19). The same 19 classes were further placed Under Review Negative. Today’s rating action by MCR as described below does not impact the Under Review Negative status of these MCR ratings.

MCR MSR ASSET CLASS TRANSACTIONS ALSO PLACED UNDER REVIEW–ANALYTICAL INTEGRATION REVIEW
As a result of the selection of the Applicable MSR Methodologies, MCR has also placed all of its outstanding transactions in this asset class Under Review–Analytical Integration Review. The rating actions on such ratings were taken in relation to the ongoing consolidation of MCR and DBRS and not for credit reasons. At a future date, DBRS Morningstar expects to review the outstanding MCR MSR asset class transactions and may assign new DBRS Morningstar ratings to the these transactions, as appropriate, using the Applicable MSR Methodologies. DBRS Morningstar will also monitor any DBRS Morningstar ratings in the MSR asset class using the Applicable MSR Methodologies. MCR expects to withdraw its outstanding ratings in the MSR asset class on or about September 30, 2020.

For more information related to the rating actions taken by MCR on the outstanding MSR transactions, please see the following rating announcement:

<a href="https://ratingagency.morningstar.com/PDD.aspx?i=1mQ8zswS1%2fA%3d" target="_blank">“Morningstar Credit Ratings Places Ratings on Mortgage Servicing Rights Asset Classes Under Review”</a>

DBRS Morningstar methodologies, including any MCR methodology selected for use by DBRS Morningstar as part of the analytical integration process, are publicly available on www.dbrsmorningstar.com under Methodologies & Criteria.

For analytical inquiries regarding this press release, please contact Quincy Tang, Managing Director, U.S RMBS.

DBRS
Quincy Tang
quincy.tang@dbrsmorningstar.com
+1 212 806-3256

For rating engagement inquiries regarding the U.S. RMBS asset class coverage or any asset classes not listed, please contact Sean O’Connor, Managing Director, Head of Global Business Development.

DBRS
Sean O’Connor
sean.oconnor@dbrsmorningstar.com
+1 212 806-3252

For more information on the transactions rated by DBRS, please visit www.dbrsmorningstar.com or contact DBRS at info@dbrsmorningstar.com. For transactions rated by MCR, please visit www.morningstarcreditratings.com or contact ratingagency@morningstar.com.

DBRS
Stephen Bernard
stephen.bernard@dbrsmorningstar.com
+1 212 806-3240