DBRS on mortgage performance

Removing adjustments to expected performance

DBRS morningstar published a report on European Mortgage Market finding a resilient performance trend and positive house price movements, this will allow to remove adjustments to expected performance.

The rating agency has observed an easing in the uncertainty surrounding all aspects of economic activity for both consumers and businesses in Europe. Government-imposed restrictions on movement throughout the pandemic, which began in Q1 2020, have also relaxed. Unprecedented government support in Europe helped to insulate mortgage markets from a downturn that many feared would cause widespread disruption. Payment holidays to help households have largely rolled off, with borrowers returning to a performing status.

The robust performance of housing markets in Europe has since continued. As of Q1 2022, house prices in all European jurisdictions with DBRS Morningstar-rated RMBS transactions have all risen (in the range of 5% to 25%) compared with house prices prior to the onset of the pandemic. As a result, we are now removing all remaining adjustments to expected house price performance in our analysis.

In May 2020, DBRS Morningstar expected the weakest transactions to be those secured by asset pools with high numbers of restructured loans, reperforming loans, or past delinquencies, along with concentrations to self-employed borrowers. As a result, for borrowers with restructured loans, borrowers in arrears in the past five years, or borrowers who are self-employed, we made additional adjustments to expected performance.

During the pandemic, it has been noted a weakening in performance in terms of increased delinquencies. However, now three-month+ delinquencies in most jurisdictions are returning to pre-pandemic levels. In other jurisdictions they did not increase to the levels we initially anticipated.

While restructured portfolios have deteriorated, overall they were not materially worse compared with pre-pandemic expectations, displaying a more stabilised and expected delinquency trend.

The reduction in the coronavirus-related house price adjustment and the rollback of adjustments to expected performance for loans to self-employed borrowers or loans with previous credit issues would lead to lower PD and loss given default for some portfolios backed by residential mortgages and/or properties. DBRS do not expect immediate rating actions on RMBS and CB transactions, but it do expect some rating actions for certain Italian and Spanish NPL transactions.