DBRS Morningstar Finalizes Provisional Ratings on Barclays Mortgage Loan Trust 2021-NQM1

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Mortgage-Backed Notes, Series 2021-NQM1 (the Notes) issued by Barclays Mortgage Loan Trust 2021-NQM1 (BARC 2021-NQM1):

-- $169.4 million Class A-1 at AAA (sf)
-- $169.4 million Class A-1X at AAA (sf)
-- $16.6 million Class A-2 at AA (sf)
-- $26.6 million Class A-3 at A (sf)
-- $12.3 million Class M-1 at BBB (sf)
-- $9.5 million Class B-1 at BB (sf)
-- $5.7 million Class B-2 at B (sf)

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

Class A-1X is an interest-only class of the Notes. The class balance represents a notional amount.

The AAA (sf) rating on the Class A-1 Notes reflects 30.65% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 23.85%, 12.95%, 7.90%, 4.00%, and 1.65% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime and non-prime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 731 loans with a total principal balance of approximately $244,200,597, as of the Cut-Off Date (October 1, 2021).

The top originator for the mortgage pool is Carrington Mortgage Services, LLC (Carrington; 93.7%). Of note, approximately 29.5% of the loans were originated by Carrington, acquired by an affiliate of the Seller from Spruce Hill Mortgage Acquisition Company, LLC (Spruce Hill), and securitized. Subsequently, the loans were culled from one of the Spruce Hill-sponsored securitizations after it was collapsed. The remaining originators each comprise less than 7.0% of the mortgage loans. These loans were acquired by Invigorate Finance, LLC and Fay Servicing, LLC, doing business as Invigorate Finance, LLC (6.3%; Invigorate Parties). The Servicers of the loans are Carrington (93.7%) and Fay Servicing, LLC (6.3%).

Nationstar Mortgage LLC will act as a Master Servicer. Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar), an affiliate of Citigroup Inc., will act as Indenture Trustee, Paying Agent, Note Registrar, Certificate Registrar and Owner Trustee. Wells Fargo Bank, N.A. (rated AA with a Negative trend by DBRS Morningstar) will act as Custodian. Pentalpha Surveillance LLC will serve as the Representations and Warranties (R&W) Reviewer.

The proposed pool is about 14 months seasoned on a weighted average (WA) basis, although seasoning may span from two to 42 months. Except for eight loans (0.5% of the pool) that were 30 to 59 days delinquent all loans were current as of the Cut-Off Date. Also, most loans (85.2% of the pool) have been always performing since origination.

In accordance with the Consumer Financial Protection Bureau (CFPB) Qualified Mortgage (QM) rules, 67.2% of the loans by balance are designated as non-QM. Eighty-two loans (10.1% of the pool) are designated as QM Rebuttable Presumption and one loan (0.4%) as QM Safe Harbor. Approximately 22.3% of the loans in the pool made to investors for business purposes are exempt from the CFPB Ability-to-Repay (ATR) and QM rules.

For this transaction, the Servicers will fund advances of delinquent principal and interest (P&I) until loans become 90 days delinquent or are otherwise deemed unrecoverable. Of note, the Servicers will make P&I Advances with respect to any loan where the borrower has been granted forbearance (or a similar loss mitigation action) as a result of the Coronavirus Disease (COVID-19) pandemic or otherwise (to the extent that such P&I advance amounts are deemed recoverable). Additionally, the Servicers are obligated to make advances with respect to taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties. Master Servicer will be obligated to make any P&I Advances that the related Servicer was required to make if the related Servicer fails to do so.

The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest in the Issuer in the amount of not less than 5.0% of the aggregate fair value of the Notes (other than the Class R Notes) to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

The Controlling Holder (the majority holder or holders, of the Class XS Notes; initially, unaffiliated with the Sponsor) may, at its option, on or after the earlier of (1) the third anniversary of the Closing Date or (2) the date on which the total loans' and real estate owned (REO) properties' balance falls to or below 30% of the loan balance as of the Cut-Off Date, purchase all of the loans and REO properties at the optional termination price described in the transaction documents (Optional Redemption).

The Controlling Holder, at its option, may purchase any mortgage loan that is 90 days or more delinquent under the Mortgage Banker Association (MBA) method (or in the case of any loan that has been subject to a coronavirus pandemic-related forbearance plan, on any date from and after the date on which such loan becomes 90 days MBA delinquent following the end of the forbearance period) or any REO property at the repurchase price (Optional Purchase Price) described in the transaction documents. The total balance of such loans purchased by the Depositor will not exceed 10% of the Cut-Off Date balance.

The transaction's cash flow structure is similar to that of other non-QM securitizations. The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Credit Event). Principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 Notes (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated notes. For the Class A-3 Notes (only after a Credit Event) and for the mezzanine and subordinate classes of notes (both before and after a Credit Event), principal proceeds will be available to cover interest shortfalls only after the more senior notes have been paid off in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid Net WA Coupon (WAC) Shortfalls due to Class A-1 down to Class B-2.

For this transaction, 61 loans comprising 10.4% of the pool balance are backed by properties located in counties designated by the Federal Emergency Management Agency as having been affected by a natural disaster, not related to the coronavirus, as of the Cut-Off Date. The Sponsor confirmed that as of October 20, 2021, no borrowers in these areas, except for one, reported any property damage. A borrower of one loan (0.2% of the pool balance) reported filing an insurance claim related to the wind damage on September 14, 2021.

Unique Transaction Features
This transaction includes Class A-1X, a senior interest-only class of Notes with the notional amount based on the lower Class A-1 Notes balance and a scheduled balance described in the transaction's documents. The interest distributions to the Class A-1X Notes cease after the thirty-fifth payment period. The inclusion of a senior interest-only class reduces the excess cash flow available to cover realized losses and unpaid Net WAC Shortfalls. It is uncommon in DBRS Morningstar-rated non-QM residential mortgage-backed securities (RMBS). That said, a short payment period and the scheduled notional balance help to offset the reduction somewhat.

The transaction uses the R&W framework that includes elements more commonly found in prime securitizations, such as a mandatory review of the alleged R&W breaches performed by an independent evaluator and a set of prescribed tests to determine if a violation occurred. The review eligibility criteria include loans liquidated with a realized loss, with a few exceptions discussed in the Representations and Warranties section of the report. Relative to most non-QM deals, the BARC 2021-NQM1 R&W framework provides more robust protection against potential R&W breaches because the review is mandatory upon a liquidation loss, and an independent reviewer is used to detect the violation and determine the materiality of the breach. However, the R&W framework is still weaker than the R&W standard used in post-crisis prime securitizations. The relative strengths and challenges of the R&W framework are discussed in detail later in the related rating report.

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. DBRS Morningstar saw increases in delinquencies for many RMBS asset classes, shortly after the onset of coronavirus.

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

As of the Cut-Off Date, no borrowers within the pool are currently subject to a coronavirus-related payment relief plan with the Servicers. In the event a borrower requests or enters into a coronavirus related forbearance plan after the Cut-Off Date but prior to the Closing Date, the Sponsor will remove such loan from the mortgage pool and remit the related Closing Date substitution amount. Loans that enter a coronavirus-related forbearance or payment relief plan on or after the Closing Date will remain in the pool.

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:

-- Robust loan attributes and pool composition,
-- Compliance with the ATR rules,
-- Improved underwriting standards,
-- Current loan status
-- Certain aspects of third-party due-diligence reviews, and
-- Certain aspects of R&W framework.

The transaction also includes the following challenges:

-- Certain nonprime, non-QM, foreign national, and investor loans,
-- Limited servicer advances of delinquent principal and interest,
-- Servicers’ financial capabilities
-- The representations and warranties standard, and
-- Entities’ lack of financial strength or securitization history.

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.

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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