DBRS Morningstar Assigns Provisional Ratings to Arroyo Mortgage Trust 2022-1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage-Backed Notes, Series 2022-1 (the Notes) to be issued by Arroyo Mortgage Trust 2022-1 (the Trust):

-- $333.3 million Class A-1 at AAA (sf)
-- $21.0 million Class A-2 at AA (sf)
-- $27.9 million Class A-3 at A (sf)
-- $17.9 million Class M-1 at BBB (sf)
-- $12.5 million Class B-1 at BB (sf)
-- $9.7 million Class B-2 at B (sf)

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

The AAA (sf) rating on the Class A-1 Notes reflects 22.85% of credit enhancement provided by subordinate notes. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 18.00%, 11.55%, 7.40%, 4.50%, and 2.25% of credit enhancement, respectively.

This is a securitization of a portfolio of fixed- and adjustable-rate expanded prime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 759 mortgage loans with a total principal balance of $431,989,498 as of the Cut-Off Date (January 1, 2022).

This transaction represents the seventh securitization by the Seller (Western Asset Mortgage Capital Corporation) or an affiliate since 2018. The largest Originator and Servicer for the mortgage pool is AmWest Funding Corp. (AmWest; 95.9%). The remaining Originators and Servicers 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, approximately 65.3% of the loans are designated as non-QM. The remaining approximately 34.7% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

For this transaction, each Servicer will fund advances of delinquent principal and interest (P&I) until loans become 180 days delinquent or are otherwise deemed unrecoverable. Additionally, each Servicer is obligated to make advances with respect to taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties.

The Sponsor, directly or through a wholly-owned affiliate, is expected to retain an eligible horizontal residual interest consisting of the Class B-1, B-2, B-3, A-IO-S, and XS Notes, collectively representing at least 5% of the fair value 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 (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 less than or equal to 30% of the Cut-Off Date balance, the Administrator, on behalf of the Issuer, may redeem the Notes (Optional Redemption) at the redemption price (par plus interest).

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 repurchase price (par plus interest), provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

The Issuer can redeem the Notes in whole but not in part at the tax redemption price (par plus interest) following a tax event as described in the transaction documents (Tax Redemption).

The transaction employs a sequential-pay cash flow structure for all classes with no performance-based triggers. Principal proceeds can be used to cover interest shortfalls on the Class A-1 Notes before being applied sequentially to amortize the balances of the remaining notes. For the Class A-2 and more subordinate classes of notes, principal proceeds can be used to cover interest shortfalls after the Class A-1 Notes are paid in full. Also, excess spread can be used to cover applied realized losses.

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.

As of the Cut-Off Date, no loans are subject to an active coronavirus-related forbearance plan with any Servicer.

For more information regarding the economic stress assumed under its baseline scenario, please see the DBRS Morningstar commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns December 2021 Update,” dated December 9, 2021.

The ratings reflect transactional strengths that include the following:

-- Robust Loan Attributes and Pool Composition.
-- Improved Underwriting Standards.
-- Compliance with the ATR rules.
-- Comprehensive Third-Party Due-Diligence Review.

The transaction also includes the following challenges:

-- Alternative Documentation Loans and Loans to Self-Employed Borrowers.
-- Non-QM and Investor Loans.
-- Representations and Warranties Framework.
-- Servicer's Financial Capability.
-- Servicer Advances of Delinquent Principal and Interest.

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

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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