DBRS Morningstar Finalizes Provisional Ratings on Arroyo Mortgage Trust 2021-1R

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following Mortgage-Backed Notes, Series 2021-1R (the Notes) issued by Arroyo Mortgage Trust 2021-1R (the Trust):

-- $342.6 million Class A-1 at AAA (sf)
-- $27.6 million Class A-2 at AA (sf)
-- $20.9 million Class A-3 at A (sf)
-- $11.4 million Class M-1 at BBB (sf)
-- $1.8 million Class B-1 at BB (sf)
-- $812.0 thousand Class B-2 at B (sf)

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

The AAA (sf) rating on the Class A-1 Notes reflects 15.60% of credit enhancement provided by subordinate notes. The AA (sf), A (sf), BBB (low) (sf), BB (sf), and B (sf) ratings reflect 8.80%, 3.65%, 0.85%, 0.40%, and 0.20% of credit enhancement, respectively.

This is a securitization of a portfolio of seasoned fixed- and adjustable-rate, expanded prime and nonprime, first-lien residential mortgages funded by the issuance of the Mortgage-Backed Notes, Series 2021-1R (the Notes). The Notes are backed by 1,233 mortgage loans with a total principal balance of $405,897,128 as of the Cut-Off Date (June 1, 2021).

Subsequent to the issuance of the related Presale Report, one loan was dropped from the securitization. The Notes are backed by 1,234 mortgage loans with a total principal balance of $406,285,237 in the Presale Report. Unless specified otherwise, all the statistics regarding the mortgage loans in the related Rating Report are based on the Presale Report balance.

The mortgage pool consists primarily of loans (95.0% of the total aggregated balance) from a previously issued and collapsed Non-QM Arroyo transaction. The remaining 5.0% of the pool are from two other New York common law trusts.

The loans are on average, more seasoned than a typical new origination non-Qualified Mortgage (non-QM) securitization. The DBRS Morningstar calculated weighted-average (WA) loan age is 61 months, and all of the loans are seasoned 24 months or more. Within the pool, 98.3% of the loans are current, 1.5% are 30 days delinquent, and 0.1% are 60 days or more delinquent. (All loans 60 days or more delinquent are part of an active forbearance plan.) The Coronavirus Disease (COVID-19)-affected loans account for 21.4% of the pool and are described in further detail below.

The originators for the mortgage pool are AmWest Funding Corp. (Amwest; 40.8%), Metro City Bank (MCB; 25.9%), East West Bank (25.8%), and other originators that each comprise less than 10.0% of the mortgage loans. The Servicers of the loans are AmWest (40.8%), MCB (25.9%), East West Bank (25.8%), and other servicers that each comprise less than 10.0% of the mortgage loans.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s 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 Qualified Mortgage (QM)/ATR rules, 79.8% of the loans are designated as non-QM. Approximately 20.2% of the loans are made 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, Class XS, and Class A-IO-S Notes, to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

The Seller will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent under the Mortgage Bankers Association method at the a price equal to the stated principal balance of the loan plus accrued interested and any advanced amounts, provided that the total repurchases may not exceed 10% of the aggregate stated principal balance as of the Cut-Off Date.

On or after the earlier of (1) the three year anniversary of the Closing Date 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 greater of (a) the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts, unreimbursed fee and expenses, and preclosing deferred and forbearance amounts, and (b) the aggregate stated principal balance of the mortgage loans plus accrued and unpaid interest, the fair value of any real-estate-owned property, unreimbursed advances and fees, and preclosing deferred and forbearance amounts. After such purchase, the Issuer 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 Servicers will fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 180 days delinquent. The Servicers are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties. The six-month advancing mechanism may increase the probability of periodic interest shortfalls in the current economic environment affected by the Coronavirus Disease (COVID-19) pandemic.

This transaction incorporates a sequential-pay cash flow structure with a pro rata feature among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 Notes sequentially (IPIP) after a Trigger Event. For more subordinated Notes, principal proceeds can be used to cover interest shortfalls as the more senior Notes are paid in full. Furthermore, excess spread can be used to cover realized losses and prior period bond writedown amounts first before being allocated to unpaid cap carryover amounts to Class A-1 down to the Class B-1 Notes.

CORONAVIRUS IMPACT
The coronavirus pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the pandemic, DBRS Morningstar saw an increase in the delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief, that may perform differently from traditional delinquencies. At the onset of the pandemic, the option to forebear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low loan-to-value ratios, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months delinquencies have been gradually trending downwards, as forbearance periods come to an end for many borrowers.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: June 2021 Update,” published on June 18, 2021), DBRS Morningstar may assume higher loss expectations for pools with loans on forbearance plans.

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 2021 Update,” dated June 18, 2021.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition.
-- Faster prepayments across non-QM.
-- Compliance with the ATR rules.
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Borrowers on forbearance plans.
-- Six-month advances of delinquent P&I.
-- The representations and warranties framework.
-- Nonprime, non-QM, and investor loans.
-- The P&I Advancing Party’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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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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