Kroll Unveils Findings of Assessing Non-QM Risk in U.S. RMBS Report

Kroll Bond Rating Agency (KBRA) announced the release of its methodology for assessing non-Qualified Mortgage (non-QM) risk in U.S. residential mortgage-backed securities (RMBS). The report, Assessing Non-QM Risk in U.S. RMBS, provides insight into KBRA’s proposed analytic approach for rating RMBS backed by non-QM loans. The methodology relies on KBRA’s fundamental analysis of mortgage risk, augmented by stressed assumptions regarding a borrower’s propensity to engage in litigation against an originator, and potential losses resulting from a successful borrower claim. While the discussion in KBRA’s report relates to non-QM loans that are prime credit quality mortgage loans, similar to loans that have been included in prime jumbo RMBS to date, KBRA would also consider rating RMBS backed by non-prime, non-QM loans. However, this collateral would pose additional considerations regarding whether the non-QM status when combined with less affluent and perhaps less sophisticated borrowers posed a heightened risk of successful challenges under the QM rule. Non-QM is a new mortgage risk factor resulting from regulations enacted by the Dodd-Frank Act. Therefore, there is little historical data demonstrating how this risk factor might affect mortgage performance. Certain assumptions made by KBRA have been derived from limited data on litigation-related mortgage loss. KBRA published a request for comment on December 5th, 2013 seeking feedback on its non-QM methodology from market participants. KBRA received a number of comments during the comment period, which ended Jan. 31, 2014, has incorporated those comments deemed appropriate, and finalized its methodology.