KBRA Releases Research – Better the Devil You Know: Diligence Sampling Pitfalls

Kroll Bond Rating Agency (KBRA) releases a report focusing on recent trends in loan level due diligence that have arisen as issuers increasingly move from 100% loan review to sampling over the last year.

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Business Wire, Inc.Business Wire, Inc.
Retrieved on: 
Friday, December 10, 2021
Information
Tags: 
Banking, Professional Services, Finance, RMBS, Bond, Review, Prevalence, Population, KBRA, Security (finance)
Geotags: 
NEW YORK, United States, UK, CANADA
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KBRA
Summary
Key Points: 
  • Kroll Bond Rating Agency (KBRA) releases a report focusing on recent trends in loan level due diligence that have arisen as issuers increasingly move from 100% loan review to sampling over the last year.
  • In this report, KBRA details the increased prevalence of diligence sampling that has been observed, particularly in prime RMBS 2.0 transactions, and describes how the results of such reviews may be skewed when loans are removed from that sampling process prior to completion.
  • KBRA has observed that meaningful portions of loan samples selected for diligence are being removed (or dropped) mid-review and excluded from the results.
  • To date, most discussions on loan sampling have focused on remaining sample populations versus the removed portions.


Kroll Bond Rating Agency (KBRA) releases a report focusing on recent trends in loan level due diligence that have arisen as issuers increasingly move from 100% loan review to sampling over the last year. While rating agency criteria generally contemplated sampling over a decade ago when independent loan reviews were first incorporated into RMBS rating methodologies, some of today’s sampling practices by issuers merit caution.

In this report, KBRA details the increased prevalence of diligence sampling that has been observed, particularly in prime RMBS 2.0 transactions, and describes how the results of such reviews may be skewed when loans are removed from that sampling process prior to completion. KBRA has observed that meaningful portions of loan samples selected for diligence are being removed (or dropped) mid-review and excluded from the results. In certain cases, these dropped portions may provide the most insight into predicting defects in the unsampled loan population. To date, most discussions on loan sampling have focused on remaining sample populations versus the removed portions. KBRA reviewed transactions issued in 2021 and identified the scope of such removals and how the results of review on those removals could change the expected error rate in the remaining securitized population.

Click here to view the report.

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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