DBRS Morningstar Requests Comments on Proposed European RMBS Insight: Italian Addendum

DBRS Morningstar is requesting comments on the proposed new “European RMBS Insight: Italian Addendum” (the Italian Addendum) of the “European RMBS Insight Methodology” (the Methodology) and corresponding European RMBS Insight Model (the Model). The Italian Addendum and the Model may supersede the Italian Residential Mortgage Addendum of the “Master European Residential Mortgage-Backed Securities Rating Methodology” published on 21 September 2020.

The Italian Addendum and Model present the criteria used to estimate defaults and losses for which Italian residential mortgage-backed securities (RMBS) and covered bonds ratings are assigned and/or monitored. The distressed sale discount, market value decline (MVD), and foreclosure cost assumptions, which are part of the Italian Addendum, will also be used for rating Italian small and medium-size enterprises (SME) and nonperforming loan transactions.

Comments should be received on or before 3 December 2020. Please submit your comments to the following email address: sfcomments@dbrsmorningstar.com.

DBRS Morningstar publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

The Italian Addendum is the fifth jurisdictional addendum published for the Methodology. The proposed application of the Methodology to the analysis of Italian residential mortgages is deemed a material change as the Methodology introduced a new proprietary default model (European RMBS Insight Model or the Model) to forecast the expected default and losses of portfolios of Italian 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 home price approach to generate MVDs.

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

Analysis of the Italian residential mortgages per the Italian Addendum includes indexation of the underlying property values up to September 2019 for the both the defaults and losses. The Italian Addendum details the Italian Loan Scoring Module (Italian LSM), which was constructed using logistic regression with loan-level data from the European DataWarehouse (EDW) to assess the relative credit risk of Italian residential mortgages. Based on scoring of the universe of eligible loans (per defined DBRS Morningstar criteria), 13 risk segments were used to construct the Italian LSM with a delinquency migration matrix estimated for each risk segment based on the observed roll rates.

Distressed sale discount estimates were derived from EDW and nonperforming loan data.

MVDs were estimated for 13 cities/regions where granular house price data was available; for the rest, DBRS Morningstar estimated country-level MVDs based on house price data provided by Nomisma through Haver Analytics. Property sale prices and cost estimates were collected from DBRS Morningstar’s nonperforming loan team and the EDW.

DBRS Morningstar currently rates 57 classes of notes across 36 Italian RMBS transactions. The impact of the adoption of the Italian Addendum to the Methodology on Italian RMBS ratings is expected to be moderately positive, but some bonds might be negatively affected.

DBRS Morningstar currently rates 10 Italian covered bond transactions and expects there to be a minimal rating impact on covered bond ratings if the Italian Addendum is finalised in the proposed form.

DBRS Morningstar notes that the Italian Portfolio Quality Assessment (PQA) used in the impact assessment exercise was estimated based on the distribution of transactional performance data of 126 Italian RMBS transactions in Intex from Q1 2000 to Q4 2012. The actual PQA applied in the rating analysis may differ as a result of the judgmental nature of this variable.

No rating impact is expected on any Italian nonperforming loan or Italian SME transactions, if the Italian Addendum is finalised in the proposed form.

Notes:
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