The proposed methodology can be downloaded here or on scoperatings.com.

The RMBS Rating Methodology describes Scope’s approach to rating European residential mortgage-backed securities (RMBS) whose collateral consists of granular portfolios of standard mortgage loans to purchase, refinance or refurbish a residential property. Scope may also apply the methodology to RMBS outside of Europe when the mortgage loan market and institutional framework are similar. This methodology complements Scope’s General Structured Finance Rating Methodology and should be read with the Counterparty Risk Methodology.

Methodology highlights

Bottom-up and top-down approaches. As part of the credit analysis, Scope forms expectations on how a mortgage portfolio will behave in stress scenarios. Its assumptions for mild or no-stress scenarios are based on the originator’s strategy and business model. For severe scenarios, the institutional and macro-economic conditions in the relevant country and the initial strategy of the originator play a big role, with assumptions built using historical case studies since 1920 that address factors such as the dynamics of the unemployment rate and the real estate market. The methodology also explicitly captures sovereign risk through country-specific assumptions.

Comprehensive credit risk framework. This methodology defines a comprehensive analytical framework for analysing the credit risk of a portfolio of mortgage loans. Information Scope relies on includes i) historical originator performance; ii) loan characteristics assessed through a generic scoring algorithm; iii) originator internal scores or public scores; and iv) peer comparisons. Scope’s approach captures the specificities of the loan portfolio and originator as well as the effect of macro shocks on the mortgage/housing market.

No mechanistic link to sovereign credit quality. As mortgage market specificities are already embedded in Scope’s portfolio analysis, there is no reason to mechanistically limit a transaction’s maximum achievable rating based on the sovereign credit quality of the country in which the assets are located. Instead, Scope assesses the resilience of each tranche to a mortgage crisis, using distressed default rate assumptions to factor in macroeconomics into the loss distribution. A country addendum integrates Scope’s view of the sovereign into the definition of the mortgage default distribution.

Originator/servicer analysis. Scope leverages on the originator’s knowledge of its customers. Its credit view of the assets is based on an analysis of the originator’s quality and risk appetite, using factors such as market positioning, product portfolio, origination strategy, risk management and the servicer’s monitoring and recovery functions. This assessment has a direct impact on the distribution of default rates and recovery rates.

Scope invites issuers, investors and other interested parties to comment on the methodology by 22 July 2022 as part of the agency’s commitment to transparency and an open dialogue with market participants.

Please send your comments to consultation@scoperatings.com.

Scope will review and publish the content of written responses in accordance with regulatory requirements, unless the respondent has explicitly requested confidentiality, and will publish the final version of the methodology thereafter.