New York, November 03, 2020 -- Moody's Investors Service, ("Moody's") has
assigned definitive ratings to five classes of mortgage insurance credit
risk transfer notes issued by Bellemeade Re 2020-3 Ltd.
Bellemeade Re 2020-3 Ltd is the third 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
Ltd., 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 2020-3 Ltd (the issuer)
and the ceding insurer will 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 will be 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 coverage
level B-2 is 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 levels.
The complete rating actions are as follows:
Issuer: Bellemeade Re 2020-3 Ltd
Cl. M-1A, Assigned A2 (sf);
Cl. M-1B, Assigned Baa1 (sf);
Cl. M-1C, Assigned Baa3 (sf);
Cl. M-2, Assigned Ba3 (sf);
Cl. B-1, Assigned B3 (sf)
RATINGS RATIONALE
Summary Credit Analysis and Rating Rationale
We expect this insured pool's aggregate exposed principal balance to incur
2.07% losses in a base case scenario, and 16.46%
losses under loss a Aaa stress scenario. The aggregate exposed
principal balance is the aggregate product of (i) loan unpaid balance,
(ii) the MI coverage percentage of each loan, and (iii) one minus
existing quota share reinsurance percentage. Nearly all of loans
(99.9% by UPB) have 7.5% existing quota share
reinsurance covered by unaffiliated third parties, hence 92.5%
pro rata share of MI losses of such loans will be taken by this transaction.
For the rest of loans having zero existing quota share reinsurance,
the transaction will bear 100% of their MI losses.
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 coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Our analysis
has considered the effect on the performance of US RMBS from the current
weak US economic activity and a gradual recovery for the coming months.
Although an economic recovery is underway, it is tenuous and its
continuation will be closely tied to containment of the virus.
As a result, the degree of uncertainty around our forecasts is unusually
high. We increased our model-derived median expected losses
by 15% (mean expected losses by 13.30%) and our Aaa
losses by 5% to reflect the likely performance deterioration resulting
from of a slowdown in US economic activity in 2020 due to the COVID-19
outbreak.
We regard the COVID-19 outbreak as a social risk under our ESG
framework, given the substantial implications for public health
and safety. 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
assumptions. 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.
Collateral Description
The reference pool consists of 112,274 prime, fixed-
and adjustable-rate, one- to four-unit,
first-lien fully-amortizing conforming mortgage loans with
a total insured loan balance of approximately $31 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%. The borrowers in the pool have
a weighted average FICO score of 751, a weighted average debt-to-income
ratio of 35.3% and a weighted average mortgage rate of 3.2%.
The weighted average risk in force (MI coverage percentage) is approximately
24.1% 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.
Approximately 99.9% (by unpaid principal balance) of the
mortgage loans have a MI coverage effective date on 2020, and there
are 90 loans having MI coverage effective date on 2019 (constituting the
rest 0.1% by unpaid principal balance).
The weighted average LTV of 91.0% 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 1 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 99.4%
covered by BPMI and 0.6% covered by LPMI based on unpaid
principal balance.
Underwriting Quality
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 57.1% of the loans are insured through delegated
underwriting and 42.9% 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.
Third-Party Review
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 0.33% of the total loans in the initial
reference pool as of September 2020, or 370 by loan count).
In spite of the small sample size and a limited TPR scope for Bellemeade
Re 2020-3 Ltd, we did not make an additional adjustment to
the loss levels because, (1) approximately 38.2% 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 reviewed property
valuation on 370 loans in the sample pool. A Freddie Mac Home Value
Explorer ("HVE") was ordered on the entire population of 352 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 370 loans, two loans were not
assigned any grade by the third-party review firm and all other
loans were graded A. The third-party diligence provider
was not able to obtain property valuations on two 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 370 loans in the sample pool. 366 loans obtained either grade
A or B, and two loans were deemed grade C due to "missing
appraisal".
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.
There are four discrepancies, in which two discrepancies are on
the DTI data field, and another two discrepancies are on the maturity
date data field.
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.
Transaction Structure
The transaction structure is very similar to GSE CRT transactions that
we have rated. The ceding insurer will retain the coverage level
A and B-2. After closing, the ceding insurer will
maintain the 50% minimal retained share of coverage of coverage
level B-2 throughout the transaction. 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, class M-1C, class M-2 and
class B-1 offered notes have credit enhancement levels of 7.50%,
6.30%, 4.25%, 2.75%
and 2.50%, respectively. The credit risk exposure
of the notes depends on the actual MI losses incurred by the insured pool.
The loss is allocated in a reverse sequential order. MI loss is
allocated starting from coverage level B-2, while investment
losses are allocated starting from class B-1 note.
So long as the senior coverage level 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 preceding three month average
of the sixty-plus delinquency amount for that payment date equals
or exceeds 75.00% of coverage level 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: 10.00%).
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.
Claims Consultant
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 coverage level B-2 has 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
such risks.
Factors that would lead to an upgrade or downgrade of the ratings:
Down
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.
Up
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.
Methodology
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.
REGULATORY DISCLOSURES
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
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
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
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vincent Lai
Associate Lead Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Sonny Weng
Vice President - Senior Analyst
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
