DBRS Morningstar Finalizes Provisional Ratings on Mello Warehouse Securitization Trust 2021-3

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on Mello Warehouse Securitization Notes, Series 2021-3 (the Notes) issued by Mello Warehouse Securitization Trust 2021-3 (MWST 2021-3):

-- $335.0 million Class A at AAA (sf)
-- $5.5 million Class B at AA (low) (sf)
-- $52.5 million Class C at A (sf)
-- $46.8 million Class D at BBB (sf)

The AAA (sf) ratings on the Notes reflect 33.00% of credit enhancement provided by subordinated notes. The AA (low) (sf), A (sf), and BBB (sf) ratings reflect 31.90%, 21.40%, and 12.05% of credit enhancement, respectively.

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

This is a securitization backed by a three-year revolving warehouse facility and funded by the issuance of the Notes. This is the ninth warehouse securitization sponsored by loanDepot.com, LLC (loanDepot). Three of the previously issued securitizations have subsequently paid off.

The warehouse facility consists of a revolving pool of first-lien, fixed- or adjustable-rate eligible mortgage loans originated by loanDepot in accordance with the purchase criteria of Fannie Mae or Freddie Mac or in accordance with the criteria of Ginnie Mae for the guarantee of securities backed by mortgage loans. The characteristics of the revolving pool include a minimum weighted-average (WA) FICO score of 725 and a maximum WA loan-to-value (LTV) ratio of 85.0%.

U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will act as the Standby Servicer, Indenture Trustee, Securities Intermediary, and Custodian. Wilmington Savings Fund Society, FSB will serve as the Owner Trustee, and Deutsche Bank National Trust Company will serve as the Mortgage Loan Custodian.

The Repo Buyer (MWST 2021-3) will enter into a master repurchase agreement (MRA) with the Repo Seller (loanDepot) and the Custodian. The MRA will provide for the transfer by the Repo Seller, against the transfer of the purchase price by the Repo Buyer, of eligible mortgage loans, with a simultaneous agreement by the Repo Buyer to transfer such purchased mortgage loans to the Repo Seller against the transfer of the repurchase price.

The Repo Seller will repurchase all purchased mortgage loans no later than 30 days following the related purchase date. However, such loans being repurchased will automatically be purchased again by the Repo Buyer unless (1) such the loan has already been in the facility for more than 120 days in the aggregate (whether or not consecutive), (2) the loan is purchased by a takeout investor, (3) the loan ceases to be an eligible mortgage loan, or (4) at the expiration of the facility. If any purchased loan exits this transaction and the Repo Seller has not exercised its prepayment option, the Repo Seller will be required to transfer one or more additional eligible mortgage loans and/or cash in exchange for the purchased mortgage loans that have been reacquired by the Repo Seller.

The aggregate principal balance of all purchased mortgage loans pledged as collateral plus amounts on deposit in the Repo Buyer’s account will at all times be at least equal to the outstanding aggregate balance of the Notes. The minimum amount of eligible mortgage loans purchased by the Repo Buyer will be $50,000,000.

The MRA will terminate on the earlier of (1) October 21, 2024; (2) the Repo Seller exercising its right to optional prepayment in full; or (3) the date of the occurrence of a repo event of default.

During the revolving period the Repo Seller will be required to make interest payments to the Notes and additionally post cash or additional eligible mortgage loans to meet any margin deficit. In general, it is expected that the Notes will not receive payments of principal until the end of the revolving period unless the Repo Seller chooses to exercise an optional prepayment. If the Repo Seller defaults under the MRA then the source of interest and principal payments to the Notes is expected to be the purchased mortgage loans that remain in the facility.

If an event of default occurs and it has not been waived, the Indenture Trustee will be required to conduct one or more auctions over a four-month period to sell the collateral. The Trustee is not allowed to sell the collateral unless liquation proceeds are adequate to make the rated Notes whole (minimum sale price). If the collateral is not sold then collections from the purchased mortgages are used to make payments to the Notes. Post default, the transaction employs a sequential-payment structure.

Each class of Notes will accrue interest at a variable note rate based on a benchmark, which is initially one month Libor. As of the date of the related report, a benchmark transition event has occurred and the related benchmark replacement date for one month Libor will be June 30, 2023. At such time, the Administrator will designate a benchmark replacement, which will be the first of the following alternatives that can be determined by the Administrator as of the benchmark replacement date:
(1) Term Secured Overnight Financing Rate (SOFR) plus the benchmark replacement adjustment.
(2) Compounded SOFR plus the benchmark replacement adjustment.
(3) Alternate interest rate selected by the relevant governing body for the applicable corresponding tenor plus the benchmark replacement adjustment.
(4) Alternate interest rate selected by the Administrator for the applicable corresponding tenor plus the benchmark replacement adjustment.

Coronavirus Disease (COVID-19) 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 very 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 and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns,” dated September 8, 2021.

The ratings reflect transactional strengths that include the following:
-- Well-qualified borrowers;
-- Ongoing third-party due diligence;
-- Standby servicer;
-- Experienced loan custodian; and
-- Margin maintenance.

The ratings reflect transactional weaknesses that include the following:
-- The presence of wet loans;
-- Limited scope of third-party due diligence; and
-- Certain aspects of the representations and warranties framework.

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

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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