New York, September 24, 2020 -- Moody's Investors Service, ("Moody's") has
assigned provisional ratings to five classes of mortgage insurance credit
risk transfer notes issued by Radnor Re 2020-2 Ltd.
Radnor Re 2020-2 Ltd. is the fifth transaction issued under
the Radnor Re program, which transfers to the capital markets the
credit risk of private mortgage insurance (MI) policies issued by Essent
Guaranty (Essent, 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, Radnor Re 2020-2 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-2H and Class B-3H 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: Radnor Re 2020-2 Ltd.
Cl. M-1A, Assigned to (P)Ba1 (sf);
Cl. M-1B, Assigned to (P)Ba2 (sf);
Cl. M-1C, Assigned to (P)Ba3 (sf);
Cl. M-2, Assigned to (P)B2 (sf);
Cl. B-1, Assigned (P)B3 (sf)
Summary Credit Analysis and Rating Rationale
We expect this insured pool's aggregate exposed principal balance to incur
2.96% losses in a base case scenario, and 19.80%
losses under 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) the reinsurance coverage
percentage. Reinsurance coverage percentage is 100% minus
existing quota share reinsurance through unaffiliated insurer, if
any. The existing quota share reinsurance applies to nearly 100%
of unpaid principal balance of the reference pool, in which approximately
10.1% have 40% quota share existing reinsurance,
and 89.9% have 20% quota share existing reinsurance.
The ceding insurer has purchased quota share reinsurance from unaffiliated
third parties, which provides proportional reinsurance protection
to the ceding insurer for certain losses.
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 residential mortgage loans
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 13.43%)
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
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
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
September 1, 2019, but on or before July 31, 2020.
The reference pool consists of 243,890 prime, fixed-
and adjustable-rate, one- to four-unit,
first-lien fully-amortizing, predominantly conforming
mortgage loans with a total insured loan balance of approximately $68
billion. 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 91.4%. The borrowers in the
pool have a weighted average FICO score of 748, a weighted average
debt-to-income ratio of 35.9% and a weighted
average mortgage rate of 3.6%. The weighted average
risk in force (MI coverage percentage net of existing reinsurance coverage)
is approximately 19.4% of the reference pool unpaid principal
balance. The aggregate exposed principal balance is the portion
of the pool's risk in force that is not covered by existing quota share
reinsurance through unaffiliated parties.
The weighted average LTV of 91.4% 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. All these 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 96.6% covered by BPMI and 3.4% covered
by LPMI based on risk in force.
We took into account the quality of Essent's insurance underwriting,
risk management and claims payment process in our analysis.
Essent'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 Essent for insurance either through delegated
underwriting or non-delegated underwriting program. Under
the delegated underwriting program, lenders can submit loans for
insurance without Essent re-underwriting the loan file.
Essent issues an MI commitment based on the lender's representation that
the loan meets the insurer's underwriting requirement. Lenders
eligible under this program must be pre-approved by Essent's risk
management group and are subject to targeted internal quality assurance
reviews. Under the non-delegated underwriting program,
insurance coverage is approved after full-file underwriting by
the insurer's underwriters. As of June 2020, approximately
62.3% of the loans in Essent's overall portfolio are insured
through delegated underwriting and 37.8% through non-delegated
underwriting. Essent broadly follows the GSE underwriting guidelines
via DU/LP, subject to certain additional limitations and requirements.
Servicers provide Essent 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.
Essent's claims review process include loan files, payment history,
quality review results, and property value. Essent sends
first document request letter to Servicer within 20 days of receipt of
claim, and may take additional 10 day period after receipt of response
to first document request to make additional requests. Claims are
paid within 60 days after all required documents are submitted.
Essent performs an internal quality assurance review on a sample basis
of delegated and non-delegated underwritten loans. Essent
selects a random and targeted sample of loans for review, and assesses
each loan file for data accuracy, underwriting quality and process
integrity. Third party vendors are utilized in the quality assurance
reviews as well as re-verifications and investigations.
Vendors must meet stringent approval requirements. 10% of
all third party reviewed loans are evaluated by Essent's staff to
ensure accuracy of findings.
Essent engaged Consolidated Analytics, Inc. 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 scope of the third-party review is weaker than other MI CRT
transactions we rated because the sample size was small (only 321 of the
total loans in the initial reference pool as of May 2020, or 0.13%
by loan count). Once the sample size was determined, the
files were selected randomly to meet the final sample count of 321 files
out of a total of 243,890 loan files.
In spite of the small sample size and a limited TPR scope for Radnor Re
2020-2, we did not make an additional adjustment to the loss
levels because, (1) approximately 35% of the loans in the
reference pool were submitted through non-delegated underwriting,
which 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.
In addition, the TPR available sample does not cover a subset of
pool that have MI coverage effective date on and after June 2020,
representing 36.2% of the pool by loan count. We
did not make any adjustment because we found no material difference in
credit characteristics between the post-June 2020 subset and the
pre-June 2020 subset, including the percentage of loans with
MI policies underwritten through non-delegated underwriting program,
which ceding insurer requires full loan file and performs independent
re-underwriting and quality assurance. We took this into
consideration in our TPR review.
Scope and results. The third-party due diligence scope focuses
on the following:
Appraisals: The third-party diligence provider also reviewed
property valuation on 321 loans in the sample pool. The third-party
review concluded a property grade of A for 315 loans. For those
loans with property grade A, an AVM was first ordered on all loans,
in which 6 AVMs returned no results due to insufficient property information.
The AVM variance is calculated as difference between AVM value and the
lesser of original appraisal or sales price. If the resulting negative
variance of the AVM was greater than 10%, or if no results
were returned, a 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 a field review was ordered on the property.
Within these grade A loans, all the appraisal values are supported
by BPO within a 10% variance. Loans qualified with a property
inspection waiver were excluded from a BPO or a field review.
In addition, there were 6 loans not assigned a property grade.
For these loans, the vendor ordered 1 broker price opinion (BPO)
and 5 field review appraisals for the related properties, however,
the results were not obtained in time for this offering. We did
not make additional adjustment to these loans given we used the lower
of appraisal and purchase price as property value in our analysis.
Credit: The third-party diligence provider reviewed credit
on 321 loans in the sample pool. The third-party diligence
provider reviewed each mortgage loan file to determine the adherence to
stated underwriting or credit extension guidelines, standards,
criteria or other requirements provided by Essent. For GSE eligible
mortgage loan files, the review of the Automated Underwriting System
(AUS) output was also performed. Per the TPR report, 314
loans have credit grade A, 1 loan has grade B and 6 loans have grade
C. These grade C exceptions were due to insufficient document provided
to due diligence provider from the lender or servicer, given the
time frame of this offering. We did not make adjustment to our
losses for these exceptions because these were all GSE eligible loans
underwritten to full documentation. Such exceptions will likely
to be cured after transaction closing.
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.
The following 16 data fields were reviewed against the loan files to confirm
the integrity of data tape information. As the TPR report suggests,
there are 29 discrepancy findings under DTI column, in which only
6 loans have higher DTI per TPR provider's calculation.
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 coverage
level A-H, coverage level B-2H and the coverage level
B-3H at closing. 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 5.90%,
5.20%, 4.50%, 3.75%
and 3.50%, respectively. The credit risk exposure
of the notes depends on the actual MI losses incurred by the insured pool.
MI losses are allocated in a reverse sequential order starting with the
coverage level B-3H. Investment deficiency amount losses
are allocated in a reverse sequential order starting with the class B-1
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 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: 7.50%).
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, when combined with the income earned on the eligible
investments, of approximately 70 days while the reinsurance trust
account and eligible investments 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 (1) with
respect to any class of notes, if the rating of that class of notes
exceeds the insurance financial strength (IFS) rating of the ceding insurer
or (2) with respect to all classes of notes, if 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
and maintain in the premium deposit account the required PDA amount (see
next paragraph) only for the notes that exceeded the ceding insurer's
rating. If the ceding insurer's rating falls below Baa2,
it will be obligated to deposit the required PDA amount for all classes
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 (but not yet distributed) on the eligible investments.
We believe the requirement that the PDA be funded only upon a rating trigger
event 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 only 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 Consolidated Analytics, Inc., as claims consultant,
to verify MI claims and reimbursement amounts withdrawn from the reinsurance
trust account once the coverage level B-3H and the coverage level
B-2H 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. As noted, 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
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same series, category/class of debt, security or pursuant
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rating assigned, and in relation to a definitive rating that may
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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