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October 04, 2019  

Rating-Agency Holdup Stalls PMI Offerings

Morningstar’s purchase of DBRS has immobilized efforts by private mortgage insurers to issue risk-transfer bonds.

Deals had been flowing even after Morningstar and DBRS closed their deal on July 2, with Arch Capital and National Mortgage Insurance each completing offerings that already were in the works. But as the two agencies huddled to combine their rating approaches, other planned transactions have been suspended.

That’s because Morningstar is the only agency that has graded such deals for mortgage insurers seeking to shed exposures to newly originated loans. Apparently, the process of reconciling its rating methods with DBRS has taken longer than anticipated.

In what one source characterized as a response to criticisms that it hadn’t communicated enough about the undertaking, meanwhile, the newly named DBRS Morningstar announced on Sept. 30 that it had yet to select an approach to grading risk-transfer securitizations of any kind. It has set a timeline of perhaps 6-8 weeks to complete the project.

That’s less of a problem for Fannie Mae and Freddie Mac, since Moody’s, S&P, Fitch and Kroll also grade their deals. But for private mortgage insurers, the setback is effectively paralyzing.

Indeed, one such issuer said his company and its peers plan to remain out of the market until the matter is resolved. Others are exploring different options, including the potential for unrated transactions. Meanwhile, some are considering the possibility of engaging another rating agency. In fact, a few spoke informally to Fitch for the first time after Morningstar agreed to buy DBRS.

Arch previously commissioned Fitch to grade risk-transfer bonds referencing older mortgages alongside Morningstar. But seasoned loans are considered less likely to default than newer ones. And Fitch’s ratings were several notches below Morningstar’s, reflecting a more conservative view of the asset class.

So why not just wait? The thinking is that the reconciliation of Morningstar’s views with DBRS’ also could yield a more conservative approach. And while the resulting method might be less strict than Fitch’s, such a shift might justify a change in rating assignments to Fitch because its grades tend to carry more weight with investors.

Other rating agencies also are developing criteria or thinking about doing so. Moody’s, for example, recently finished taking comments on a proposed set of rating parameters.

Private mortgage insurers write policies that protect mortgage holders against defaults, typically for loans with down payments of less than 20%. Their risk-transfer securitizations essentially act as reinsurance on those exposures by moving some risk to bondholders.