DBRS Morningstar Finalizes Provisional Ratings on Oceanview Mortgage Trust 2022-SBC1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of secured notes issued by Oceanview Mortgage Trust 2022-SBC1:

-- Class A at AAA (sf)
-- Class AIO at AAA (sf)
-- Class M1B at AA (sf)
-- Class M1C at AA (low) (sf)
-- Class M2B at A (sf)
-- Class M2C at A (low) (sf)
-- Class M3A at BBB (high) (sf)
-- Class M3B at BBB (sf)
-- Class M3C at BBB (low) (sf)
-- Class B1A1 at BB (high) (sf)
-- Class B1A2 at BB (high) (sf)
-- Class B1C at BB (low) (sf)
-- Class B2C at B (low) (sf)
-- Class XP1 at AAA (sf)
-- Class XP2 at AAA (sf)
-- Class XP3 at AAA (sf)
-- Class XP4 at AAA (sf)

All trends are Stable.

Since DBRS Morningstar assigned the Provisional Ratings on May 5, 2022, it updated the Rating Report to include the following section on Closing Opinions: Closing opinions typically include “true sale” under the federal bankruptcy code for the loans conveyed by each seller into the securitization, and if the seller is not an entity subject to the federal bankruptcy code, then the opinion should cover true sale under an insolvency or similar proceeding by the regulator having authority over the seller entity. In this transaction, one of the sellers is a Colorado insurance company, but a true sale opinion was not provided as to Colorado insurance regulatory proceedings. Rather, the true sale opinion covered federal bankruptcy law and New York UCC law, which, while analogous, do not directly address the regulator with authority over the seller.

The collateral consists of 414 individual loans secured by 414 commercial, multifamily, and single-family rental (SFR) properties with an average loan balance of $527,496. (Unless noted otherwise, average refers to straight average.) The transaction is configured with a sequential pay pass-through structure. Given the complexity of the structure and granularity of the pool, DBRS Morningstar applied its “North American CMBS Multi-Borrower Rating Methodology” (the CMBS Methodology) and “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” (the RMBS Methodology).

Of the 414 individual loans, 294 loans, representing 71.4% of the pool, have a fixed interest rate with an average of 6.28%. The floating-rate loans are structured with interest rate life floors ranging from 4.75% to 10.125% with a straight average of 6.67% and interest rate margins ranging from 1.000% to 6.875% with a straight average of 3.21%. To determine the probability of default (POD) and loss severity given default inputs in the CMBS Insight Model for the floating-rate loans, DBRS Morningstar applied a stress to the various indexes that corresponded with the remaining fully extended term of the loans and added the respective contractual loan spread to determine a stressed interest rate over the loan term. DBRS Morningstar looked to the greater of the interest rate floor or the DBRS Morningstar stressed index rate when calculating stressed debt service. The average modeled coupon rate across all loans was 7.36%. The loans have original terms of 15 years to 30 years and amortize over periods of 15 years to 30 years. When the cut-off loan balances were measured against the DBRS Morningstar Stressed Net Cash Flow (NCF) and their respective actual constants or stressed interest rates, there were 155 loans, representing 39.9% of the pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default.

The pool has an average original term length of 358 months or 29.8 years with an average remaining term of 352 months or 29.3 years. Based on the original loan balance and the appraisal at origination, the pool had a weighted-average loan-to-value ratio (WA LTV) of 67.1%. DBRS Morningstar applied a pool average LTV of 75.1%, which reflects adjustments made to values based on implied cap rates by market rank. Furthermore, all 414 loans fully amortize over their respective remaining loan terms, resulting in 100.0% expected amortization; this is not representative of typical commercial mortgage-backed securities (CMBS) conduit pools, which have substantial concentrations of interest-only (IO) and balloon loans. DBRS Morningstar research indicates that, for CMBS conduit transactions securitized between 2000 and 2021, average amortization by year has ranged between 6.5% and 22.0% with an overall average of 15.6%.

Of the 414 loans, four loans, representing 0.2% of the trust balance, are secured by SFR properties. The CMBS Methodology does not currently contemplate ratings on SFR properties. To address this, DBRS Morningstar severely increased the expected loss on these loans by approximately 4.3x over the average non-SFR expected loss.

The fully adjusted default assumption and model-generated severity figures from the DBRS Morningstar CMBS Insight Model were then applied to the residential mortgage-backed securities (RMBS) Cash Flow Model, which is adept at modeling sequential and pro rata structures on loan pools in excess of 400 loans.

As part of the RMBS Cash Flow Model, DBRS Morningstar incorporated four constant prepayment rate stresses: 5.0%, 10.0%, 15.0%, and 20.0%. Additional assumptions in the RMBS Cash Flow Model include a 22-month recovery lag period, 100% servicer advancing, and four default curves (uniform, front, middle, and back). The shape and duration of the default curves were based on the RMBS loss curves. DBRS Morningstar assumed extraordinary expenses, where the AAA pays 100% of the annual cap, 80% for AA, 60% for “A,” 40% for BBB, 30% for BB, and 20% for B per annum, and assumed they were paid annually over 120 months and stepped down by 75% after month 60. Lastly, rates were stressed, both upward and downward, based on their respective loan indexes.

The pool is relatively diverse based on loan size with an average balance of $527,469, a concentration profile equivalent to that of a pool with 278 equal-size loans and a top 10 loan concentration of only 8.4%. Increased pool diversity helps to insulate the higher-rated classes from loan-level event risk. The loans are mostly secured by traditional property types (i.e., retail, multifamily, office, and industrial) with no exposure to higher-volatility property types, such as hotels, and minimal exposure to self-storage or manufactured housing communities (MHCs), which represent 2.2% of the pool balance combined. All loans in the pool fully amortize over their respective loan terms between 180 and 360 months, thus eliminating refinance risk. A third-party due-diligence firm conducted guideline and nonowner occupancy reviews on 61.1% of the loans in the pool and pay history reviews on 100% loans by balance for 164 loans with a pay history provided by the servicer. Data integrity checks were also performed on the pool. Of the 259 loans on which a guideline review was performed, all were assigned a grade A or B, except one loan that was assigned a valuation grade of C.

The pool has high-term risk as supported by the low DBRS Morningstar WA DSCR of 1.22x. The DBRS Morningstar DSCR reflects conservatively stressed debt service amounts on floating-rate loans. Furthermore, the pool has a cut-off WA LTV of 67.1% based on appraisal values at loan origination that suggests overall moderate leverage.

The pool is heavily concentrated, with multifamily comprising 45.5% of the pool. Multifamily properties included mixed-use assets that were predominately residential. Based on DBRS Morningstar research, multifamily properties securitized in conduit transactions have had lower default rates than most other property types.

Of the 46 loans that DBRS Morningstar sampled (reviewed third-party photographs and Google Street Views), 36 loans, representing 70.8% of the DBRS Morningstar sample, were modeled with Average – to Poor property quality. DBRS Morningstar increased the POD for these loans to account for the elevated risk. Furthermore, DBRS Morningstar modeled any uninspected loans as Average –, which has a slightly increased POD level.

Limited property-level information was available for DBRS Morningstar to review. Asset Summary Reports, property condition reports (PCRs), Phase I/II Environmental reports, and historical financial cash flows were not provided in conjunction with this securitization. DBRS Morningstar received a long- or short-form appraisal for loans in its sample, which DBRS Morningstar used in the NCF analysis process. No environmental reports were provided; however, only 9.9% of the pool consists of loans secured by industrial properties, which would typically have an increased risk of environmental concerns originating at the property. Furthermore, as of the cut-off date, approximately 30.0% of the mortgage loans will be covered by one or more blanket environmental insurance policies. No PCRs were provided; however, DBRS Morningstar used capital expense estimates in excess of its guideline amounts and its assessment of the sampled property quality to stress the NCF analysis. DBRS Morningstar’s NCF analysis resulted in a 20.6% reduction to the Issuer’s NCF, well above the median historical reduction of 8.0% across CMBS conduit transactions, which provides meaningful stress to the default levels.

DBRS Morningstar was provided limited borrower information, net worth or liquidity information, and credit history. DBRS Morningstar modeled loans with Weak borrower strength, which increases the stress on the default rate. Furthermore, DBRS Morningstar was provided a 12-month pay history on each loan. Any loan with more than one late pay within this period was modeled with additional stress to the default rate. This assumption was applied to 17 loans, representing 5.0% of the pool balance. Additionally, loans originated under the Lite Doc or Bank Statement documentation programs were modeled with additional stress to account for risk associated with borrowers who are potentially less sophisticated or have negative credit histories. This assumption was applied to 49 loans, representing 11.5% of the pool balance. Finally, a borrower Final FICO score as of January 2021 was provided on 141 of the 414 loans, with an average FICO score of 740. While the CMBS Methodology does not contemplate FICO scores, the RMBS Methodology does and would characterize a FICO score of 740 as near-prime, where prime is considered greater than 750. A borrower with a FICO score of 740 could generally be described as potentially having had previous credit events (foreclosure, bankruptcy, etc.), but it is likely that these credit events were cleared about two to five years ago.

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.

Classes AIO are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodologies are North American CMBS Multi-Borrower Rating Methodology (March 26, 2021) and 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 a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 not 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.

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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