Eagle Re 2021-1 Ltd. — Moody’s assigns provisional ratings to mortgage insurance credit risk transfer notes issued by Eagle Re 2021-1 Ltd.
Rating Action: Moody’s assigns provisional ratings to mortgage insurance credit risk transfer notes issued by Eagle Re 2021-1 Ltd.Global Credit Research – 06 Apr 2021New York, April 06, 2021 — Moody’s Investors Service, (“Moody’s”) has assigned provisional ratings to nine classes of mortgage insurance credit risk transfer notes issued by Eagle Re 2021-1 Ltd.Eagle Re 2021-1 Ltd. is the fifth transaction issued under the Eagle Re program, which transfers to the capital markets the credit risk of private mortgage insurance (MI) policies issued by Radian Guaranty Inc (Radian, the ceding insurer) on a portfolio of residential mortgage loans. The notes are exposed to the risk of claims payments on the MI policies, and depending on the notes’ priority, may incur principal and interest losses when the ceding insurer makes claims payments on the MI policies.On the closing date, Eagle Re 2021-1 Ltd. (the issuer) and the ceding insurer will enter into a reinsurance agreement providing excess of loss reinsurance on mortgage insurance policies issued by the ceding insurer on a portfolio of residential mortgage loans. Proceeds from the sale of the notes will be deposited into the reinsurance trust account for the benefit of the ceding insurer and as security for the issuer’s obligations to the ceding insurer under the reinsurance agreement. The funds in the reinsurance trust account will also be available to pay noteholders, following the termination of the trust and payment of amounts due to the ceding insurer. Funds in the reinsurance trust account will be used to purchase eligible investments and will be subject to the terms of the reinsurance trust agreement.Following the instruction of the ceding insurer, the trustee will liquidate assets in the reinsurance trust account to (1) make principal payments to the notes as the insurance coverage in the reference pool reduces due to loan amortization or policy termination, and (2) reimburse the ceding insurer whenever it pays MI claims after the Class B-3 coverage level is written off. While income earned on eligible investments is used to pay interest on the notes, the ceding insurer is responsible for covering any difference between the investment income and interest accrued on the notes’ coverage levels.The complete rating actions are as follows:Issuer: Eagle Re 2021-1 Ltd.Cl. M-1A, Assigned (P)A3 (sf)Cl. M-1B, Assigned (P)Baa1 (sf)Cl. M-1C, Assigned (P)Baa3 (sf)Cl. M-2A, Assigned (P)Ba2 (sf)Cl. M-2B, Assigned (P)Ba3 (sf)Cl. M-2C, Assigned (P)B1 (sf)Cl. M-2, Assigned (P)Ba3 (sf)Cl. B-1, Assigned (P)B2 (sf)Cl. B-2, Assigned (P)B3 (sf)RATINGS RATIONALESummary Credit Analysis and Rating RationaleWe expect this insured pool’s aggregate exposed principal balance to incur a baseline scenario-mean loss of 1.63%, a baseline scenario-median loss of 1.34%, and a loss of 14.66% at a stress level consistent with our Aaa ratings. The aggregate exposed principal balance is the product, for all the mortgage loans covered by MI policies, of (i) the unpaid principal balance of each mortgage loan, (ii) the MI coverage percentage.The coronavirus pandemic has had a significant impact on economic activity. Although global economies have shown a remarkable degree of resilience to date and are returning to growth, the uneven effects on individual businesses, sectors and regions will continue throughout 2021 and will endure as a challenge to the world’s economies well beyond the end of the year. While persistent virus fears remain the main risk for a recovery in demand, the economy will recover faster if vaccines and further fiscal and monetary policy responses bring forward a normalization of activity. As a result, there is a heightened degree of uncertainty around our forecasts. Our analysis has considered the effect on the performance of consumer assets from a gradual and unbalanced recovery in US economic activity. As a result, the degree of uncertainty around our forecasts is unusually high. We increased our model-derived median expected losses by 7.5% (6.6% for the mean) and our Aaa loss by 2.5% to reflect the likely performance deterioration resulting from the slowdown in US economic activity due to the coronavirus outbreak. These adjustments are lower than the 15% median expected loss and 5% Aaa loss adjustments we made on pools from deals issued after the onset of the pandemic until February 2021. Our reduced adjustments reflect the fact that the loan pool in this deal does not contain any loans to borrowers who are not currently making payments. For newly originated loans, post-COVID underwriting takes into account the impact of the pandemic on a borrower’s ability to repay the mortgage. For seasoned loans, as time passes, the likelihood that borrowers who have continued to make payments throughout the pandemic will now become non-cash flowing due to COVID-19 continues to decline.In addition, we considered that for this transaction, similar to other mortgage insurance credit risk transfer deals, payment deferrals are not claimable events and thus are not treated as losses; rather they would only result in a loss if the borrower ultimately defaults after receiving the payment deferral and a mortgage insurance claim is filed.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.We calculated losses on the pool using our US Moody’s Individual Loan Analysis (MILAN) model based on the loan-level collateral information as of the cut-off date. Loan-level adjustments to the model results included, but were not limited to, adjustments for origination quality.Collateral DescriptionAll of the mortgage loans have an insurance coverage effective date on or after August 1, 2020, to through December 31, 2020. The reference pool consists of 166,656 prime, fixed- and adjustable-rate, one- to four-unit, first-lien fully-amortizing conforming mortgage loans with a total insured loan balance of approximately $50 billion. All loans in the reference pool had a loan-to-value (LTV) ratio at origination that was greater than 80% with a weighted average of 90.5%. The borrowers in the pool have a weighted average FICO score of 752, a weighted average debt-to-income ratio of 35.5% and a weighted average mortgage rate of 3.0% by unpaid balance. The weighted average risk in force (MI coverage percentage) is approximately 22.3% of the reference pool unpaid principal balance. The aggregate exposed principal balance is the portion of the pool’s risk in force that is not covered by existing quota share reinsurance through unaffiliated parties.The weighted average LTV of 90.5% is far higher than those of recent private label prime jumbo deals, which typically have LTVs in the high 60’s range, however, it is in line with those of recent MI CRT transactions. All these insured loans in the reference pool were originated with LTV ratios greater than 80%. 100% of insured loans were covered by mortgage insurance at origination with 99.6% covered by BPMI and 0.4% covered by LPMI based on risk in force.Underwriting QualityWe took into account the quality of Radian’s insurance underwriting, risk management and claims payment process in our analysis.Radian’s underwriting requirements address credit, capacity (income), capital (asset/equity) and collateral. It has a licensed in-house appraiser to review appraisals.Lenders submit mortgage loans to Radian for insurance either through delegated underwriting or non-delegated underwriting program. Under the delegated underwriting program, lenders can submit loans for insurance without Radian re-underwriting the loan file. Radian issues an MI commitment based on the lender’s representation that the loan meets the insurer’s underwriting requirement. Radian allows exceptions for loans approved through both its delegated and non-delegated underwriting programs. Lenders eligible under the delegated program must be pre-approved by Radian’s risk management group and are subject to targeted internal quality assurance reviews. Under the non-delegated underwriting program, insurance coverage is approved after full-file underwriting by the insurer’s underwriters. As of January 2021, approximately 67% of the loans in Radian’s overall portfolio are insured through delegated underwriting, 28% through non-delegated underwriting and 5% through contract underwriting. Radian broadly follows the GSE underwriting guidelines via DU/LP, subject to few additional limitations and requirements.Servicers provide Radian monthly reports of insured loans that are more than 60-days delinquent prior to any submission of claims. Claims are typically submitted when servicers have taken possession of the title to the properties. Radian’s claims review process include loan files, payment history, quality review results, and property value. Radian sends first document request letter to Servicer within 35 days of receipt of claim, and may take additional 10 day period after receipt of response to first document request to make additional requests. Claims are paid within 60 days after all required documents are submitted.Radian performs an internal quality assurance review on a sample basis of delegated and non-delegated underwritten loans. Radian selects a random and targeted sample of loans for review, and assesses each loan file for data accuracy, underwriting quality and process integrity. Third party vendors are utilized in the quality assurance reviews as well as re-verifications and investigations. Vendors must meet stringent approval requirements.Third-Party ReviewRadian engaged Opus Capital Markets Consultants, LLC to perform a data analysis and diligence review of a sampling of mortgage loans files submitted for mortgage insurance. This review included validation of credit qualifications, verification of the presence of material documentation as applicable to the mortgage insurance application, updated valuation analysis and comparison, and a tape-to-file data integrity validation to identify possible data discrepancies. The scope does not include a compliance review.The scope of the third-party review is weaker than other MI CRT transactions we rated because the sample size was small (only 341 of the total loans in the initial reference pool as of January 2021, or 0.20% by loan count). Once the sample size was determined, the files were selected randomly to meet the final sample count of 341 files out of a total of 168,020 loan files.In spite of the small sample size and a limited TPR scope for Eagle Re 2021-1, we did not make an additional adjustment to the loss levels because (1) the underwriting quality of the insured loans is monitored under the GSEs’ stringent quality control system and (2) MI policies will not cover any costs related to compliance violations.The loans are reviewed on a quarterly basis and depending on the timing of the transaction relative to the quarterly review, the loans from that production may or may not be included. The TPR available sample does not cover a subset of pool that have MI coverage effective date on and after October 2020, representing approximately 57% of the pool by loan count. We did not make any adjustment because we found no material difference in credit characteristics between the post-October 2020 subset and the pre-October 2020 subset, including the percentage of loans with MI policies underwritten through non-delegated underwriting program, which ceding insurer requires full loan origination file and performs independent re-underwriting and quality assurance. We took this into consideration in our TPR review.Scope and results. The third-party due diligence scope focuses on the following:Appraisals: The third-party diligence provider also reviewed property valuation on 341 loans in the sample pool. A Freddie Mac Home Value Explorer (“HVE”) was ordered on the entire population of 341 files. If the resulting value of the AVM was less than 90% of the value reflected on the original appraisal, or if no results were returned, a Broker Price Opinion (“BPO”) was ordered on the property. If the resulting value of the BPO was less than 90% of the value reflected on the original appraisal, an Appraisal Review appraisal was ordered on the property. Among the 341 loans, one (1) loan was not assigned any grade by the third-party review firm and all other loans were graded A. The third-party diligence provider was not able to obtain property valuations on one mortgage loan due to the inability to complete the field review assignment during the due diligence review period.Credit: The third-party diligence provider reviewed credit on 341 loans in the sample pool. Most of the loans were graded A. There were three loans with final grade of “C”.Data integrity: The third-party review firm was provided a data file with loan level data, which was audited against origination documents to determine the accuracy of data found within the data tape. Per the due diligence report, there are twelve discrepancy findings under four fields: DTI, maturity date, original loan amount, and product type. The discrepancies are considered to be non-material.Reps & Warranties FrameworkThe ceding insurer does not make any representations and warranties to the noteholders in this transaction. Since the insured mortgages are predominantly GSE loans, the individual sellers would provide exhaustive representations and warranties to the GSEs that are negotiated and actively monitored. In addition, the ceding insurer may rescind the MI policy for certain material misrepresentation and fraud in the origination of a loan, which would benefit the MI CRT noteholders.Transaction StructureThe transaction structure is very similar to GSE CRT transactions that we have rated. The ceding insurer will retain the senior coverage level A, coverage level B-3 and coverage level B-4 at closing. The offered notes benefit from a sequential pay structure. The transaction incorporates structural features such as a 12.5-year maturity and a sequential pay structure for the non-senior tranches, resulting in a shorter expected weighted average life on the offered notes. The notes will be subject to redemption prior to the maturity date at the option of the ceding insurer upon the occurrence of an optional termination event, including a clean-up call event and an optional call.Funds raised through the issuance of the notes are deposited into a reinsurance trust account and are distributed either to the noteholders, when insured loans amortize or MI policies terminate, or to the ceding insurer for reimbursement of claims paid when loans default. Interest on the notes is paid from income earned on the eligible investments and the coverage premium from the ceding insurer. Interest on the notes will accrue based on the outstanding balance of the notes, but the ceding insurer will only be obligated to remit coverage premium based on each note’s coverage level.Credit enhancement in this transaction is comprised of subordination provided by mezzanine and junior tranches. The rated Class M-1A, Class M-1B, Class M-1C, Class M-2A, Class M-2B, Class M-2C, Class B-1 and Class B-2 offered notes have credit enhancement levels of 5.75%, 5.00%, 3.50%, 3.17%, 2.83%, 2.50%, 2.25% and 2.00%, respectively. The credit risk exposure of the notes depends on the actual MI losses incurred by the insured pool. MI losses are allocated in a reverse sequential order starting with the coverage level B-4. Investment deficiency amount losses are allocated in a reverse sequential order starting with the Class B-2 notes (or Class B-3, if reopened after closing).The floating rate note coupons reference SOFR which will be based on compounded SOFR or Term SOFR, as applicable. Following the occurrence of a benchmark transition event, a benchmark replacement will be determined by the issuer, and such benchmark replacement will replace SOFR and will be the benchmark for the next following accrual period and each accrual period thereafter (unless and until a subsequent benchmark transition event is determined to have occurred). Any determination made by the issuer with respect to the occurrence of a benchmark transition event or a benchmark replacement, and any calculation by the indenture trustee of the applicable benchmark for an accrual period, will be final and binding on the certificateholders in the absence of manifest error.So long as the senior coverage level is outstanding, and no performance trigger event occurs, the transaction structure allocates principal payments on a pro-rata basis between the senior and non-senior reference tranches. Principal is then allocated sequentially amongst the non-senior tranches. Principal payments are all allocated to senior reference tranches when trigger event occurs.A trigger event with respect to any payment date will be in effect if the coverage level amount of coverage level A for such payment date has not been reduced to zero and either (i) the preceding three month average of the sixty-plus delinquency amount for that payment date equals or exceeds 75.00% of Class A subordination amount or (ii) the subordinate percentage (or with respect to the first payment date, the original subordinate percentage) for that payment date is less than the target CE percentage (minimum C/E test: 7.50%).Premium Deposit Account (PDA)The premium deposit account will benefit the transaction upon a mandatory termination event (e.g. the ceding insurer fails to pay the coverage premium and does not cure, triggering a default under the reinsurance agreement), by providing interest liquidity to the noteholders, when combined with the income earned on the eligible investments, of approximately 70 days while the reinsurance trust account and eligible investments are being liquidated to repay the principal of the notes.On the closing date, the ceding insurer will establish a cash and securities account (the PDA) but no initial deposit amount will be made to the account by the ceding insurer unless the premium deposit event is triggered. The premium deposit event will be triggered (1) with respect to any class of notes, if the rating of that class of notes exceeds the insurance financial strength (IFS) rating of the ceding insurer or (2) with respect to all classes of notes, if the ceding insurer’s IFS rating falls below Baa2. If the note ratings exceed that of the ceding insurer, the insurer will be obligated to deposit into and maintain in the premium deposit account the required PDA amount (see next paragraph) only for the notes that exceeded the ceding insurer’s rating. If the ceding insurer’s rating falls below Baa2, it will be obligated to deposit the required PDA amount for all classes of notes.The required PDA amount for each class of notes and each month is equal to the excess, if any, of (i) the coupon rate of the note multiplied by (a) the applicable funded percentage, (b) the coverage level amount for the coverage level corresponding to such class of notes and (c) a fraction equal to 70/360, over (ii) two times the investment income collected (but not yet distributed) on the eligible investments.We believe the requirement that the PDA be funded only upon a rating trigger event does not establish a linkage between the ratings of the notes and the IFS rating of the ceding insurer because, 1) the required PDA amount is small relative to the entire deal, 2) the risk of PDA not being funded could theoretically occur only if the ceding insurer suddenly defaults, causing a rating downgrade from investment grade to default in a very short period, which is a highly unlikely scenario, and 3) even if the insurer becomes insolvent, there would be a strong incentive for the insurer’s insolvency regulator to continue to make the interest payments to avoid losing reinsurance protection provided by the deal.Claims ConsultantTo mitigate risks associated with the ceding insurer’s control of the trust account and discretion to unilaterally determine the MI claims amounts (i.e. ultimate net losses), the ceding insurer will engage Opus Capital Markets Consultants, LLC, as claims consultant, to verify MI claims and reimbursement amounts withdrawn from the reinsurance trust account once the coverage level of Class B-3 has been written down. The claims consultant will review on a quarterly basis a sample of claims paid by the ceding insurer covered by the reinsurance agreement. In verifying the amount, the claims consultant will apply a permitted variance to the total paid loss for each MI Policy of +/- 2%. The claims consultant will provide a preliminary report to the ceding insurer containing results of the verification. If there are findings that cannot be resolved between the ceding insurer and the claims consultant, the claims consultant will increase the sample size. A final report will be delivered by the claims consultant to the trustee, the issuer and the ceding insurer. The issuer will be required to provide a copy of the final report to the noteholders and the rating agencies.Unlike RMBS transactions where there is typically some level of independent third party oversight by the trustee, the master servicer and/or the securities administrator, MI CRT transactions typically do not have such oversight. As noted, the ceding insurer not only has full control of the trust account but can also determine, at its discretion, the MI claims amount. The ceding insurer will then direct the trustee to withdraw the funds to reimburse for the claims paid. Since the trustee is not required to verify the MI claims amount, there could be a scenario where funds are withdrawn from the reinsurance trust account in excess of the amounts necessary to reimburse the ceding insurer. As such, we believe the claims consultant in this transaction will provide the oversight to mitigate such risks.Factors that would lead to an upgrade or downgrade of the ratings:DownLevels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody’s original expectations as a result of a higher number of obligor defaults or deterioration in the value of the mortgaged property securing an obligor’s promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.UpLevels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings of the subordinate bonds up. Losses could decline from Moody’s original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor’s promise of payment. Transaction performance also depends greatly on the US macro economy and housing market.The principal methodology used in these ratings was Moody’s Approach to Rating US RMBS Using the MILAN Framework published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody’s evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.Moody’s quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody’s weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Ruomeng Cui Asst Vice President – Analyst Structured Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.