KBRA releases research to assess the potential impacts of the Federal Housing Finance Agency’s (FHFA) plans to shift the requirement of three credit reports (tri-merge) to two credit reports (bi-merge) for single-family loan acquisitions. To do so, KBRA conducted an analysis that utilized data compiled from KBRA-rated RMBS 2.0 transactions. In the report, we use this data set and define metrics to examine how well the proposed bi-merge approach (as well as some alternate approaches) closely resemble those obtained via the current tri-merge approach. KBRA’s analysis not only evaluates whether these approaches resemble the tri-merge scores on an average basis, it also evaluates the distribution of deviation from tri-merge scores in the population. Finally, KBRA’s analysis looks directly at the potential impact to loss estimation for RMBS pools—estimating the likelihood of a more meaningful impact to loss estimation in general and across RMBS pool types and sizes.

Key Takeaways

• When comparing the bi-merge (average) and the tri-merge, KBRA-defined measures of difference and variance were found to be close to zero across KBRA’s study population, in aggregate.
• Utilizing KBRA’s RMBS Default and Loss Model and KBRA’s study population, expected loss (EL) differences between the use of tri-merge and bi-merge (average) approaches were minimal, in aggregate, though the distribution of differences did include some tails.
• Variances can become more pronounced for securitizations that include smaller loan counts; for example, the KBRA report presents the higher likelihood associated with prime and non-prime transactions with lower loan counts experiencing an underrepresentation of credit risk of -10 basis points (bps) or more versus transactions with higher loan counts.

Click here to view the report.

Related Publications

• Determining Standardized Coverage Ratios: Resi Investor Loans
• RMBS Trend Watch: Slow and Steady 2023
• KBRA RMBS Exposure to First Republic Bank
• Distressed Bank Exposure in RMBS 2.0
• Single-Family Rentals: Headwinds Mounting
• RMBS Credit Indices

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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