DBRS Morningstar Finalizes Provisional Ratings on Mill City Mortgage Loan Trust 2021-NMR1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgaged-Backed Securities, Series 2021-NMR1 (the Notes) issued by Mill City Mortgage Loan Trust 2021-NMR1 (the Trust):

-- $40.3 million Class A1A at AAA (sf)
-- $120.9 million Class A1B at AAA (sf)
-- $161.2 million Class A1 at AAA (sf)
-- $190.9 million Class A2 at AA (high) (sf)
-- $209.8 million Class A3 at A (high) (sf)
-- $226.1 million Class A4 at BBB (high) (sf)
-- $29.7 million Class M1 at AA (high) (sf)
-- $18.9 million Class M2 at A (high) (sf)
-- $8.1 million Class M3A at BBB (high) (sf)
-- $8.1 million Class M3B at BBB (high) (sf)
-- $16.3 million Class M3 at BBB (high) (sf)
-- $6.8 million Class B1A at BB (high) (sf)
-- $6.8 million Class B1B at BB (high) (sf)
-- $13.6 million Class B1 at BB (high) (sf)
-- $6.3 million Class B2A at B (high) (sf)
-- $6.3 million Class B2B at B (high) (sf)
-- $12.5 million Class B2 at B (high) (sf)

Classes A1, A2, A3, A4, M3, B1, and B2 are exchangeable. These classes can be exchanged for combinations of initial exchangeable notes as specified in the offering documents.

The AAA (sf) ratings on the Notes reflect 48.50% of credit enhancement provided by subordinated notes. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (high) (sf) ratings reflect 39.00%, 32.95%, 27.75%, 23.40%, and 19.40% of credit enhancement, respectively.

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

This transaction is a securitization of a portfolio of primarily first-lien, seasoned, performing, and reperforming residential mortgages funded by the issuance of the Notes. The Notes are backed by 2,579 loans with a total principal balance of approximately $312,929,995 as of the Cut-Off Date (December 31, 2020).

The loans are approximately 149 months seasoned. As of the Cut-Off Date, 85.2% of the pool is current, 8.2% is 30 to 59 days delinquent, 3.3% is 60 to 89 days delinquent, and 0.4% is 90+ days delinquent under the Mortgage Bankers Association delinquency method; additionally, 3.0% of the pool is in bankruptcy. Subject to adjustments made by DBRS Morningstar, approximately 32.9% of the pool has been zero times 30 (0 x 30) days delinquent for the past 24 months, 49.9% has been 0 x 30 for the past 12 months, and 63.2% has been 0 x 30 for the past six months. In certain months, 20.4% of loans were missing data and as such are not included when determining the 0 x 30 days delinquent duration.

Modified loans comprise 75.2% of the portfolio. The modifications happened more than two years ago for 80.7% of the modified loans. Within the pool, 859 loans have noninterest-bearing deferred amounts, which equates to 6.4% of the total principal balance.

In accordance with the Consumer Financial Protection Bureau Qualified Mortgage (QM) rules, no loan is designated as QM Safe Harbor or QM Rebuttable Presumption. There is 13.0% designated as non-QM and approximately 87.0% of the loans are not subject to the QM rules.

Approximately 8.1% of the pool comprises nonfirst-lien loans.

Nomura Corporate Funding Americas, LLC (NCFA), as the Sponsor, is acquiring (most of) the loans from various Mill City entities in connection with the securitization. NCFA, as the Sponsor, directly or through a majority-owned affiliate, will acquire and retain a 5.0% eligible vertical interest in the transaction to satisfy the credit risk retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. These loans were originated and previously serviced by various entities through purchases in the secondary market.

As of the Cut-Off Date, the loans are serviced by NewRez LLC doing business as Shellpoint Mortgage Servicing (75.3%) and Fay Servicing, LLC (24.7%).

There will not be any advancing of delinquent principal or interest on any mortgages by the servicers or any other party to the transaction; however, the servicers are obligated to make advances in respect of taxes and insurance and reasonable costs and expenses incurred in the course of servicing and disposing of properties.

When the aggregate pool balance of the mortgage loans is reduced to less than 20% of the Cut-Off Date balance, the holders of more than 50% of the Class X Certificates will have the option to cause the Trust to sell its remaining property (other than amounts in the Breach Reserve Account) to one or more third-party purchasers so long as the aggregate proceeds meet a minimum price.

When the aggregate pool balance is reduced to less than 10% of the balance as of the Cut-off Date, the holder(s) of more than 50% of the most subordinate class of Notes, or their affiliates, may purchase all mortgage loans, real-estate-owned properties, and other properties from the Trust, as long as the aggregate proceeds meet a minimum price.

The transaction employs a sequential-pay cash flow structure. Principal proceeds can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M2 and more subordinate bonds will not be paid until the more senior classes are retired.

CORONAVIRUS IMPACT: REPERFORMING LOAN (RPL)
The Coronavirus Disease (COVID-19) 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.

RPL is a traditional RMBS asset class that consists of securitizations backed by pools of seasoned performing and reperforming residential home loans. Although borrowers in these pools may have experienced delinquencies in the past, the loans have been largely performing for the past six to 24 months since issuance. Generally, these pools are highly seasoned and contain sizable concentrations of previously modified loans.

As a result of the coronavirus pandemic, 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 affects 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: January 2021 Update,” published on January 28, 2021), for the RPL asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than it previously used. DBRS Morningstar derives such MVD assumptions through a fundamental home price approach based on the forecasted unemployment rates and GDP growth outlined in the 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 RPL asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans that were previously delinquent, recently modified, or have higher updated loan-to-value ratios (LTVs) may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020, 536 borrowers (30.5% of the borrowers by balance) either have completed forbearance or deferral plans or are on such plans because the borrowers reported financial hardship related to the coronavirus pandemic. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends.

For this transaction, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower principal and interest (P&I) collections and (2) no servicing advances on delinquent P&I. These assumptions include:

1. Increased delinquencies for the first 12 months at all rating levels,
2. No voluntary prepayments for the first 12 months for the AAA (sf) and AA (high) (sf) rating levels, and
3. No liquidation recovery for the first 12 months for the AAA (sf) and AA (high) (sf) 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: January 2021 Update,” dated January 28, 2021.

The full description of the strengths, challenges, and mitigating factors are detailed in the related 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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