DBRS Morningstar Finalizes Provisional Ratings on Residential Mortgage Loan Trust 2020-2

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Mortgage-Backed Notes, Series 2020-2 (the Notes) issued by Residential Mortgage Loan Trust 2020-2 (RMLT 2020-2):

-- $246.2 million Class A-1 at AAA (sf)
-- $17.5 million Class A-2 at AA (sf)
-- $25.6 million Class A-3 at A (sf)
-- $24.5 million Class M-1 at BBB (sf)
-- $12.4 million Class B-1 at BB (sf)

The AAA (sf) rating on the Class A-1 Notes reflect 30.25% of credit enhancement provided by subordinated notes in the pool. The AA (sf), A (sf), BBB (sf), and BB (sf) ratings reflect 25.30%, 18.05%, 11.10%, and 7.60% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

RMLT 2020-2 is a securitization of a portfolio of fixed- and adjustable-rate expanded prime and nonprime primarily first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 793 mortgage loans with a total principal balance of $353,014,444 as of the Cut-Off Date (June 1, 2020).

The originators for the mortgage pool are HomeXpress Mortgage Corp. (36.1%); Greenbox Loans, Inc. (22.5%); Excelerate (13.6%); and other originators, which comprise 27.8% of the mortgage loans. The Servicer of the loans is Servis One, Inc. doing business as BSI Financial Services.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s Qualified Mortgage (QM) and Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the QM/ATR rules, 69.4% of the loans are designated as Non-QM, 1.6% as QM Safe Harbor, and 3.9% as QM Rebuttable Presumption. Approximately 25.1% of the loans are to investors for business purposes and, hence, are not subject to the QM/ATR rules.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of the Class B-3 and XS Notes representing at least 5% of the Notes to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On or after the earlier of (1) the payment date occurring in June 2023 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Administrator, at the Issuer’s option, may redeem all of the outstanding Notes at a price equal to the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts. After such purchase, the Depositor must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

The Servicer will fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent. The Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties.

UNIQUE TRANSACTION FEATURES
Unlike most prior RMLT non-QM securitizations where the Servicer funds advances of delinquent P&I on loans up to 180 days delinquent, for this transaction, the Servicer will only fund advances up to 90 days of delinquent P&I. The Servicer has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. However, the Servicer will be required to advance P&I at the end of the related forbearance period. The Servicer is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties. The three-month advancing mechanism may increase the probability of periodic interest shortfalls in the current economic environment affected by the Coronavirus Disease (COVID-19) pandemic. As a large number of borrowers seek forbearance on their mortgages in the coming months, P&I collections may reduce meaningfully.

Unlike the prior RMLT non-QM (or traditional non-QM) securitizations, which incorporate a pro rata feature among the senior tranches, this transaction employs a sequential-pay cash flow structure across the entire capital stack. Principal proceeds can cover interest shortfalls on the Class A-1 and A-2 Notes sequentially. For more subordinated Notes, principal proceeds can cover interest shortfalls as the more senior Notes are paid in full. Furthermore, excess spread can cover realized losses and prior period bond writedown amounts first before being allocated to unpaid cap carryover amounts to Class A-1 down to Class B-2.

CORONAVIRUS PANDEMIC IMPACT
The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many residential mortgage-backed securities (RMBS) asset classes, some meaningfully.

The non-QM sector is a traditional RMBS asset class that consists of securitizations backed by pools of residential home loans that may fall outside of the Consumer Financial Protection Bureau’s ATR rules, which became effective on January 10, 2014. Non-QM loans encompass the entire credit spectrum. They range from high-FICO, high-income borrowers who opt for interest-only or higher debt-to-income ratio mortgages, to near-prime debtors who have had certain derogatory pay histories but were cured more than two years ago, to nonprime borrowers whose credit events were only recently cleared, among others. In addition, some originators offer alternative documentation or bank statement underwriting to self-employed borrowers in lieu of verifying income with W-2s or tax returns. Finally, foreign nationals and real estate investor programs, while not necessarily non-QM in nature, are often included in non-QM pools.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies, loans on forbearance plans, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario, (see “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020), for the non-QM asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than what it previously used. Such MVD assumptions are derived through a fundamental home price approach based on the forecast unemployment rates and GDP growth outlined in the aforementioned moderate scenario. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the non-QM asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value ratio (LTV) borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with prior credit events have exhibited difficulties in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Self-employed borrowers are potentially exposed to more volatile income sources, which could lead to reduced cash flows generated from their businesses. Higher LTV borrowers, with lower equity in their properties, generally have fewer refinance opportunities and therefore slower prepayments. In addition, certain pools with elevated geographic concentrations in densely populated urban metropolitan statistical areas may experience additional stress from extended lockdown periods and the slowdown of the economy.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 10.2% (as of June 12, 2020) of the borrowers are on forbearance plans because the borrowers reported financial hardship related to coronavirus. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends.

For the loans, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower P&I collections and (2) limited servicing advances on delinquent P&I. These assumptions include:

1. Increasing delinquencies on the AAA (sf) and AA (sf) rating levels for the first 12 months.
2. Increasing delinquencies on the A (sf) and below rating levels for the first nine months.
3. Assuming no voluntary prepayments for the first 12 months for the AAA (sf) and AA (sf) rating levels.
4. Assuming no liquidation recovery for the first 12 months for all rating levels.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: “DBRS Morningstar Provides Update on Rating Methodologies in Light Of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: June Update,” dated June 1, 2020.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition.
-- Satisfactory third-party due-diligence review.
-- Improved underwriting standards.
-- Compliance with the ATR rules.

The transaction also includes the following challenges:

-- Borrowers on forbearance plans.
-- Three-month advance of delinquent P&I.
-- Representations and warranties framework.
-- Nonprime, non-QM, and investor loans.
-- The Servicer’s financial capability.

The full description of the strengths, challenges, and mitigating factors is detailed in the related rating report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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