New York, March 11, 2020 -- Moody's Investors Service, ("Moody's") has
assigned provisional ratings to 16 classes of mortgage insurance credit
risk transfer notes issued by Bellemeade Re 2020-1 Ltd.
The ratings range from (P)A3 (sf) to (P)B3 (sf).
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 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 Class
B-2 coverage level 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 2020-1 Ltd.
Cl. M-1A, Assigned (P)A3 (sf)
Cl. M-1B, Assigned (P)Baa3 (sf)
Cl. M-1C, Assigned (P)Ba3 (sf)
Cl. M-1CA, Assigned (P)Ba1 (sf)
Cl. M-1CAR, Assigned (P)Ba1 (sf)
Cl. M-1CAS, Assigned (P)Ba1 (sf)
Cl. M-1CB, Assigned (P)B1 (sf)
Cl. M-1CBR, Assigned (P)B1 (sf)
Cl. M-1CBS, Assigned (P)B1 (sf)
Cl. M-1CS, Assigned (P)Ba3 (sf)
Cl. M-1CR, Assigned (P)Ba3 (sf)
Cl. M-1CRB, Assigned (P)B1 (sf)
Cl. M-1CSB, Assigned (P)B1 (sf)
Cl. M-2A, Assigned (P)B3 (sf)
Cl. M-2AR, Assigned (P)B3 (sf)
Cl. M-2AS, Assigned (P)B3 (sf)
Summary Credit Analysis and Rating Rationale
We expect this insured pool's aggregate exposed principal balance
to incur 2.78% losses in a base case scenario, and
18.63% 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 8.9% 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 coverage percentage).
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
Feburary 1, 2018, but before December 31, 2019.
The reference pool consists of 173,122 prime, fixed-
and adjustable-rate, one- to four-unit,
first-lien fully-amortizing conforming mortgage loans with
a total insured loan balance of approximately $47 billion.
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 36.3% 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. 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 97.7% covered by BPMI and 2.3% covered
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 reference pool,
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.
We refer to the M-1A, M-1B, M-1C,
M-2 and B-1 notes as the original notes, and the M-1CR,
M-1CS, M-1CI, M-1CA, M-1CAR,
M-1CAS, M-1CAI, M-1CB, M-1CBR,
M-1CBS, M-1CBI, M-1CRB, M-1CSB,
M-2R, M-2S, M-2I, M-2A,
M-2AR, M-2AS, M-2AI, M-2B,
M-2BR, M-2BS, M-2BI, M-2RB,
M-2SB notes as the exchangeable notes; together we refer to
them as the notes.
The M-1C notes can be exchanged for M-1CA and M-1CB
notes, M-1CR and M-1CI notes and M-1CS and
The M-1CA notes can be exchanged for M-1CAR and M-1CAI
notes and M-1CAS and M-ICAI notes.
The M-1CB notes can be exchanged for M-1CBR and M-1CBI
notes and M-1CBS and M-ICBI notes.
The M-1CRB notes can be exchanged for M-1CB and M-1CAI
The M-1CSB notes can be exchanged for M-1CB and M-1CAI
The M-2 notes can be exchanged for M-2A and M-2B
notes, M-2R and M-2I notes and M-2S and M-2I
The M-2A notes can be exchanged for M-2AR and M-2AI
notes and M-2AS and M-2AI notes.
The M-2B notes can be exchanged for M-2BR and M-2BI
notes and M-2BS and M-2BI notes.
The M-2RB notes can be exchanged for M-2B and M-2AI
The M-2SB notes can be exchanged for M-2B and M-2AI
Classes M-1CAI , M-1CBI, M-1CI,
M-2AI, M-2BI and M-2I are interest-only
(IO) tranches referencing the notional balances of Classes M-1CA,
M-1CB, M-1C, M-2A, M-2B
and M-2, respectively.
Classes M-2RB, M-2SB, M-1CRB and M-1CSB
are each an exchangeable for two classes that are initially offered at
closing. The ratings of M-2RB, M-2SB,
M-1CRB and M-1CSB reference the ratings of Classes M-2B
and M-1CB, respectively. In the event Classes M-1CB
and M-2B are written down, we would continue to rate classes
M-2RB, M-2SB, M-1CRB and M-1CSB
consistent with Class M-2B or M-1CB's last outstanding
ratings so long as Classes M-2RB, M-2SB, M-1CRB
and M-1CSB are still outstanding.
The transaction structure is very similar to GSE CRT transactions that
we have rated. The ceding insurer will retain the senior Class
A tranche and the first loss Class B-2 tranche. The ceding
insurer will also retain certain portions of each risk coverage level.
The proportion of each coverage level relating to the class of notes that
Bellemeade Re 2020-1 is offering is the funded percentage of that
coverage level. The ceding insurer is retaining the unfunded portion
of each coverage level. 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 M-1A,
M-1B and M1C offered notes, excluding exchangeable notes,
have credit enhancement levels of 8.25%, 6.25%
and 4.00%, 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 B-2 tranche.
So long as the senior reference tranche 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.
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 coverage level 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
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 October 2019.
Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The Credit Rating for Bellemeade Re 2020-1 Ltd. was assigned
in accordance with Moody's existing Methodology entitled "Moody's
Approach to Rating US RMBS Using the MILAN Framework," dated
October 2019. Please note that on 12/9/2019, Moody's
released a Request for Comment, in which it has requested market
feedback on potential revisions to its Methodology to expand the scope
to include private label non-prime first-lien mortgage loans
originated during or after 2009. If the revised Methodology is
implemented as proposed, the Credit Rating on Bellemeade Re 2020-1
Ltd. will not be affected. Please refer to Moody's
Request for Comment, titled "Moody's Approach to Rating
US RMBS Using the MILAN Framework: Proposed Methodology Update"
for further details regarding the implications of the proposed Methodology
revisions on certain Credit Ratings.
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 of the disclosure form.
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
AVP - 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