New York, June 30, 2020 -- Moody's Investors Service, ("Moody's") has
assigned definitive ratings to three classes of mortgage insurance credit
risk transfer notes issued by Bellemeade Re 2020-1 Ltd.
Bellemeade Re 2020-1 Ltd. is the first transaction issued
in 2020 under the Bellemeade Re program, which transfers to the
capital markets the credit risk of private mortgage insurance (MI) policies
issued by Arch Mortgage Insurance Company (Arch) and United Guaranty Residential
Insurance Company (UGRIC) (each, a subsidiary of Arch Capital Group,
and collectively, the ceding insurer) on a portfolio of residential
mortgage loans. The notes are exposed to the risk of claims payments
on the MI policies, and depending on the notes' priority,
may incur principal and interest losses when the ceding insurer makes
claims payments on the MI policies.
On the closing date, Bellemeade Re 2020-1 Ltd. (the
issuer) and the ceding insurer enter into a reinsurance agreement providing
excess of loss reinsurance on mortgage insurance policies issued by the
ceding insurer on a portfolio of residential mortgage loans. Proceeds
from the sale of the notes are deposited into the reinsurance trust account
for the benefit of the ceding insurer and as security for the issuer's
obligations to the ceding insurer under the reinsurance agreement.
The funds in the reinsurance trust account will also be available to pay
noteholders, following the termination of the trust and payment
of amounts due to the ceding insurer. Funds in the reinsurance
trust account will be used to purchase eligible investments and will be
subject to the terms of the reinsurance trust agreement.
Following the instruction of the ceding insurer, the trustee will
liquidate assets in the reinsurance trust account to (1) make principal
payments to the notes as the insurance coverage in the reference pool
reduces due to loan amortization or policy termination, and (2)
reimburse the ceding insurer whenever it pays MI claims after the Class
B-2 and Class B-3 coverage levels are written off.
While income earned on eligible investments is used to pay interest on
the notes, the ceding insurer is responsible for covering any difference
between the investment income and interest accrued on the notes' coverage
The complete rating actions are as follows:
Issuer: Bellemeade Re 2020-1 Ltd.
Cl. B-1, Assigned Baa2(sf)
Cl. M-1A, Assigned A1 (sf)
Cl. M-1B, Assigned Baa1 (sf)
Summary Credit Analysis and Rating Rationale
We expect this insured pool's aggregate exposed principal balance to incur
3.11% losses in a base case scenario, and 18.36%
losses under loss a Aaa stress scenario. The aggregate exposed
principal balance is the product, for all the mortgage loans covered
by MI policies, of (i) the unpaid principal balance of each mortgage
loan, (ii) the MI coverage percentage, and (iii) for approximately
9.1% of the mortgage loans where 7.5% of the
losses are covered by existing third-party insurance, 92.5%,
and for the rest of the mortgage loans, 100% (the reinsurance
Our analysis has considered the effect of the COVID-19 outbreak
on the US economy as well as the effects that the announced government
measures put in place to contain the virus, will have on the performance
of mortgage loans. Specifically, for US RMBS, loan
performance will weaken due to the unprecedented spike in the unemployment
rate, which may limit borrowers' income and their ability to service
debt. The softening of the housing market will reduce recoveries
on defaulted loans, also a credit negative. Furthermore,
borrower assistance programs, such as forbearance, may adversely
impact scheduled cash flows to bondholders.
The contraction in economic activity in the second quarter will be severe
and the overall recovery in the second half of the year will be gradual.
However, there are significant downside risks to our forecasts in
the event that the pandemic is not contained and lockdowns have to be
reinstated. As a result, the degree of uncertainty around
our forecasts is unusually high. Moody's expected loss for this
pool in a baseline scenario-mean is 3.11%,
in a baseline scenario-median is 2.73%, and
reaches 18.36% at a stress level consistent with our Aaa
ratings. These losses incorporate an additional stress of 13.54%,
15.00% and 5.00%, respectively,
to account for the increased likelihood of deterioration in the performance
of the underlying mortgage loans as a result of a slowdown in US economic
activity in 2020 due to the coronavirus outbreak.
We regard the COVID-19 outbreak as a social risk under our ESG
framework, given the substantial implications for public health
Servicing practices, including tracking COVID-19-related
loss mitigation activities, may vary among servicers in the transaction.
These inconsistencies could impact reported collateral performance and
affect the timing of any breach of performance triggers, the timing
of policy terminations and the amount of ultimate net loss.
We may infer and extrapolate from the information provided based on this
or other transactions or industry information, or make stressed
We calculated losses on the pool using our US Moody's Individual Loan
Analysis (MILAN) model based on the loan-level collateral information
as of the cut-off date. Loan-level adjustments to
the model results included, but were not limited to, adjustments
for origination quality.
Each mortgage loan has an insurance coverage effective date on or after
February 1, 2018, but on or before December 31, 2019.
The reference pool consists of 163,292 prime, fixed-
and adjustable-rate, one- to four-unit,
first-lien fully-amortizing conforming mortgage loans with
a total insured loan balance of approximately $44 billion.
Nearly all loans in the reference pool had a loan-to-value
(LTV) ratio at origination that was greater than 80%, with
a weighted average of 91.3%. The borrowers in the
pool have a weighted average FICO score of 747, a weighted average
debt-to-income ratio of 36.1% and a weighted
average mortgage rate of 3.9%. The weighted average
risk in force (MI coverage percentage) is approximately 24.2%
of the reference pool total unpaid principal balance. The aggregate
exposed principal balance is the portion of the pool's risk in force that
is not covered by existing third party reinsurance.
The weighted average LTV of 91.3% is far higher than those
of recent private label prime jumbo deals, which typically have
LTVs in the high 60's range, however, it is in line with those
of recent STACR high LTV CRT transactions. Except for one loan,
all other insured loans in the reference pool were originated with LTV
ratios greater than 80%. 100% of insured loans were
covered by mortgage insurance at origination with 98.14%
covered by BPMI and 1.86% covered by LPMI based on risk
We took into account the quality of Arch's insurance underwriting,
risk management and claims payment process in our analysis.
Arch's underwriting requirements address credit, capacity (income),
capital (asset/equity) and collateral. It has a licensed in-house
appraiser to review appraisals.
Lenders submit mortgage loans to Arch for insurance either through delegated
underwriting or non-delegated underwriting program. Under
the delegated underwriting program, lenders can submit loans for
insurance without Arch re-underwriting the loan file. Arch
issues an MI commitment based on the lender's representation that the
loan meets the insurer's underwriting requirement. Arch does not
allow exceptions for loans approved through its delegated underwriting
program. Lenders eligible under this program must be pre-approved
by Arch. Under the non-delegated underwriting program,
insurance coverage is approved after full-file underwriting by
the insurer's underwriters. For Arch's overall portfolio,
approximately 57% of the loans are insured through delegated underwriting
and 43% through non-delegated. Arch follows the GSE
underwriting guidelines via DU/LP but applies additional overlays.
Servicers provide Arch monthly reports of insured loans that are 60-day
delinquent prior to any submission of claims. Claims are typically
submitted when servicers have taken possession of the title to the properties.
Claims are submitted by uploading or entering on Arch's website,
electronic transfer or paper.
Arch performs an internal quality assurance review on a sample basis of
delegated and non-delegated underwritten loans to ensure that (i)
the risk exposure of insured mortgage loans is accurately represented,
(ii) lenders submitting loans via delegated underwriting program are adhering
to Arch's guidelines, and (iii) internal underwriters are following
guidelines and maintaining consistent underwriting standards and processes.
Arch has a solid quality control process to ensure claims are paid timely
and accurately. Similar to the above procedure, Arch's claims
management reviews a sample of paid claims each month. Findings
are used for performance management as well as identified trends.
In addition, there is strong oversight and review from internal
and external parties such as GSE audits, Department of Insurance
audits, audits from an independent account firm, and Arch's
internal audits and compliance. Arch is also SOX compliant.
PwC, an independent account firm, performs a thorough audit
of Arch's claim payment process.
Arch engaged Opus Capital Markets Consultants, LLC, to perform
a data analysis and diligence review of a sampling of mortgage loans files
submitted for mortgage insurance. This review included validation
of credit qualifications, verification of the presence of material
documentation as applicable to the mortgage insurance application,
updated valuation analysis and comparison, and a tape-to-file
data integrity validation to identify possible data discrepancies.
The scope does not include a compliance review. The review sample
size was small (only 325 of the total loans in the initial reference pool
as of March 2020, or 0.19% by loan count).
In spite of the small sample size and a limited TPR scope for Bellemeade
Re 2020-1 Ltd., we did not make an additional adjustment
to the loss levels because, (1) approximately 36% of the
loans in the reference pool have gone through full re-underwriting
by the ceding insurer, (2) the underwriting quality of the insured
loans is monitored under the GSEs' stringent quality control system,
and (3) MI policies will not cover any costs related to compliance violations.
Scope and results. The third-party due diligence scope focuses
on the following:
Appraisals: The third-party diligence provider also reviewed
property valuation on 325 loans in the sample pool. A Freddie Mac
Home Value Explorer ("HVE") was ordered on the entire population of 325
files. If the resulting value of the AVM was less than 90%
of the value reflected on the original appraisal, or if no results
were returned, a Broker Price Opinion ("BPO") was ordered on the
property. If the resulting value of the BPO was less than 90%
of the value reflected on the original appraisal, an Appraisal Review
appraisal was ordered on the property. Among the 325 loans,
one loan has a valuation variance greater than 5% and no loan has
a variance of greater than 10%. The third-party diligence
provider was not able to obtain property valuations on three mortgage
loans due to the inability to complete the field review assignment during
the due diligence review period.
Credit: The third-party diligence provider reviewed credit
on 325 loans in the sample pool. One loan had a final grade of
"C" due to insufficient reserves.
Data integrity: The third-party review firm was provided
a data file with loan level data, which was audited against origination
documents to determine the accuracy of data found within the data tape.
Reps & Warranties Framework
The ceding insurer does not make any representations and warranties to
the noteholders in this transaction. Since the insured mortgages
are predominantly GSE loans, the individual sellers would provide
exhaustive representations and warranties to the GSEs that are negotiated
and actively monitored. In addition, the ceding insurer may
rescind the MI policy for certain material misrepresentation and fraud
in the origination of a loan, which would benefit the MI CRT noteholders.
The transaction structure is very similar to GSE CRT transactions that
we have rated. The ceding insurer will retain the senior Class
A note, the Class B-2 note and the Class B-3 note.
The offered notes benefit from a sequential pay structure. The
transaction incorporates structural features such as a 10-year
bullet maturity and a sequential pay structure for the non-senior
tranches, resulting in a shorter expected weighted average life
on the offered notes.
Funds raised through the issuance of the notes are deposited into a reinsurance
trust account and are distributed either to the noteholders, when
insured loans amortize or MI policies terminate, or to the ceding
insurer for reimbursement of claims paid when loans default. Interest
on the notes is paid from income earned on the eligible investments and
the coverage premium from the ceding insurer. Interest on the notes
will accrue based on the outstanding balance of the notes, but the
ceding insurer will only be obligated to remit coverage premium based
on each note's coverage level.
Credit enhancement in this transaction is comprised of subordination provided
by mezzanine and junior tranches. The rated Class M-1A,
Class M-1B and Class B-1 offered notes have credit enhancement
levels of 9.5%, 7.75% and 7.5%,
respectively. The credit risk exposure of the notes depends on
the actual MI losses incurred by the insured pool. MI and investment
losses are allocated in a reverse sequential order starting with the Class
So long as the senior reference note is outstanding, and no performance
trigger event occurs, the transaction structure allocates principal
payments on a pro-rata basis between the senior and non-senior
reference tranches. Principal is then allocated sequentially amongst
the non-senior tranches. Principal payments are all allocated
to senior reference tranches when trigger event occurs.
A trigger event with respect to any payment date will be in effect if
the coverage level amount of coverage level A for such payment date has
not been reduced to zero and either (i) the related sixty-plus
delinquency amount for that payment date equals or exceeds 75.00%
of Class A subordination amount or (ii) the subordinate percentage (or
with respect to the first payment date, the original subordinate
percentage) for that payment date is less than the target CE percentage
(minimum C/E test: 13.50%).
Premium Deposit Account (PDA)
The premium deposit account will benefit the transaction upon a mandatory
termination event (e.g. the ceding insurer fails to pay
the coverage premium and does not cure, triggering a default under
the reinsurance agreement), by providing interest liquidity to the
noteholders for 70 days while the assets of the reinsurance trust account
are being liquidated to repay the principal of the notes.
On the closing date, the ceding insurer will establish a cash and
securities account (the PDA) but no initial deposit amount will be made
to the account by the ceding insurer unless the premium deposit event
is triggered. The premium deposit event will be triggered if the
rating of the notes exceed the insurance financial strength (IFS) rating
of the ceding insurer or the ceding insurer's IFS rating falls below Baa2.
If the note ratings exceed that of the ceding insurer, the insurer
will be obligated to deposit into the premium deposit account the coverage
premium only for the notes that exceeded the ceding insurer's rating.
If the ceding insurer's rating falls below Baa2, it is obligated
to deposit coverage premium for all reinsurance coverage levels.
The required PDA amount for each class of notes and each month is equal
to the excess, if any, of (i) the coupon rate of the note
multiplied by (a) the applicable funded percentage, (b) the coverage
level amount for the coverage level corresponding to such class of notes
and (c) a fraction equal to 70/360, over (ii) two times the investment
income collected on the eligible investments.
We believe the PDA arrangement does not establish a linkage between the
ratings of the notes and the IFS rating of the ceding insurer because,
1) the required PDA amount is small relative to the entire deal,
2) the risk of PDA not being funded could theoretically occur if the ceding
insurer suddenly defaults, causing a rating downgrade from investment
grade to default in a very short period; which is a highly unlikely
scenario, and 3) even if the insurer becomes insolvent, there
would be a strong incentive for the insurer's insolvency regulator to
continue to make the interest payments to avoid losing reinsurance protection
provided by the deal.
To mitigate risks associated with the ceding insurer's control of the
trust account and discretion to unilaterally determine the MI claims amounts
(i.e. ultimate net losses), the ceding insurer will
engage Opus Capital Markets, as claims consultant, to verify
MI claims and reimbursement amounts withdrawn from the reinsurance trust
account once the Class B-2 and the Class B-3 coverage levels
have been written down. The claims consultant will review on a
quarterly basis a sample of claims paid by the ceding insurer covered
by the reinsurance agreement. In verifying the amount, the
claims consultant will apply a permitted variance to the total paid loss
for each MI Policy of +/- 2%. The claims consultant
will provide a preliminary report to the ceding insurer containing results
of the verification. If there are findings that cannot be resolved
between the ceding insurer and the claims consultant, the claims
consultant will increase the sample size. A final report will be
delivered by the claims consultant to the trustee, the issuer and
the ceding insurer. The issuer will be required to provide a copy
of the final report to the noteholders and the rating agencies.
Unlike RMBS transactions where there is typically some level of independent
third party oversight by the trustee, the master servicer and/or
the securities administrator, MI CRT transactions typically do not
have such oversight. For example, the ceding insurer not
only has full control of the trust account but can also determine,
at its discretion, the MI claims amount. The ceding insurer
will then direct the trustee to withdraw the funds to reimburse for the
claims paid. Since the trustee is not required to verify the MI
claims amount, there could be a scenario where funds are withdrawn
from the reinsurance trust account in excess of the amounts necessary
to reimburse the ceding insurer. As such, we believe the
claims consultant in this transaction will provide the oversight to mitigate
Factors that would lead to an upgrade or downgrade of the ratings:
Levels of credit protection that are insufficient to protect investors
against current expectations of loss could drive the ratings down.
Losses could rise above Moody's original expectations as a result of a
higher number of obligor defaults or deterioration in the value of the
mortgaged property securing an obligor's promise of payment. Transaction
performance also depends greatly on the US macro economy and housing market.
Other reasons for worse-than-expected performance include
poor servicing, error on the part of transaction parties,
inadequate transaction governance and fraud.
Levels of credit protection that are higher than necessary to protect
investors against current expectations of loss could drive the ratings
of the subordinate bonds up. Losses could decline from Moody's
original expectations as a result of a lower number of obligor defaults
or appreciation in the value of the mortgaged property securing an obligor's
promise of payment. Transaction performance also depends greatly
on the US macro economy and housing market.
The principal methodology used in these ratings was "Moody's Approach
to Rating US RMBS Using the MILAN Framework" published in April 2020 and
available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
In addition, Moody's publishes a weekly summary of structured finance
credit ratings and methodologies, available to all registered users
of our website, www.moodys.com/SFQuickCheck.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis relies on an assessment of collateral characteristics to
determine the collateral loss distribution, that is, the function
that correlates to an assumption about the likelihood of occurrence to
each level of possible losses in the collateral. As a second step,
Moody's evaluates each possible collateral loss scenario using a
model that replicates the relevant structural features to derive payments
and therefore the ultimate potential losses for each rated instrument.
The loss a rated instrument incurs in each collateral loss scenario,
weighted by assumptions about the likelihood of events in that scenario
occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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support provider and in relation to each particular credit rating action
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credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
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Regulatory disclosures contained in this press release apply to the credit
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Moody's general principles for assessing environmental, social
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At least one ESG consideration was material to the credit rating action(s)
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Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653