DBRS Morningstar Places 12 GSE CRT Transactions Under Review with Positive Implications

DBRS, Inc. (DBRS Morningstar) placed its ratings on 316 outstanding classes of the following 12 government-sponsored enterprise credit risk transfer (GSE CRT) transactions Under Review with Positive Implications:

-- Fannie Mae Connecticut Avenue Securities, Series 2017-C03
-- Fannie Mae Connecticut Avenue Securities, Series 2017-C05
-- Fannie Mae Connecticut Avenue Securities, Series 2018-C01
-- Fannie Mae Connecticut Avenue Securities, Series 2018-C03
-- Fannie Mae Connecticut Avenue Securities, Series 2018-C05
-- Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2015-DN1
-- Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2015-DNA3
-- Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2016-DNA3
-- Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2016-HQA1
-- Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2016-HQA4
-- Freddie Mac Structured Agency Credit Risk Debt Notes, Series 2017-DNA3
-- Freddie Mac STACR Trust 2019-DNA1

The rating actions were taken in relation to the Request for Comment on the proposed “Appendix 8: Expected Mortgage Insurance Payments” to the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” on November 22, 2019. In conjunction with the proposed expected mortgage insurance payment appendix, DBRS Morningstar also implements a minimum asset correlation in its RMBS Insight model with respect to pools with very high loan counts.

In the RMBS Insight model, DBRS Morningstar’s approach to ratings categories includes two components: one based on identifiable risks and the other based on unidentifiable risks. Unidentifiable risk refers to causes of variation that are not captured by the independent variables in the model. For unidentifiable risks, the variation is quantified by estimating an asset correlation.

The asset correlation model is a parametric function of geographic concentration, loan size concentration and credit quality. Asset correlation increases with concentration and decreases with credit quality. As a corollary, correlation decreases with loan size concentration, but remains positive because of broader economic correlations at the regional and national levels. In pools with very high loan counts, the loan diversity benefits can result in low correlation calculations and gaps between any rating categories can be compressed and potentially subject to rating volatility.

To mitigate this risk while maintaining appropriate rating scalability for pools of different credit quality, DBRS Morningstar implements minimum asset correlations in its RMBS Insight to effectively capture pool risks. This represents a change from DBRS Morningstar’s previous approach of enforcing minimum spacing between each rating category for pools with very high loan counts.

The implementation of minimum asset correlations is deemed to be a material change to the existing “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology,” the impact of which is expected to be more significant for seasoned GSE CRT transactions with strong credit attributes and collateral performance.

A preliminary analysis indicated that the potential rating actions on DBRS Morningstar-rated GSE CRT transactions are expected to be confirmations or upgrades.

Notes:
For more information related to these rating actions, please refer to the following press release:

<a href="https://www.dbrs.com/research/353169/" target="_blank">"DBRS Morningstar Requests Comments on Proposed Mortgage Insurance Appendices to RMBS Insight 1.3: U.S. RMBS Model and Rating Methodology and Operational Risk Assessment for U.S. RMBS Originators"</a>

The principal methodologies are U.S. RMBS Surveillance Methodology and RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA

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