DBRS Morningstar Finalizes Provisional Ratings on Homeward Opportunities Fund Trust 2022-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2022-1 (the Certificates) issued by Homeward Opportunities Fund Trust 2022-1 (the Trust):

-- $224.7 million Class A-1 at AAA (sf)
-- $22.6 million Class A-2 at A (high) (sf)
-- $38.5 million Class A-3 at A (sf)
-- $22.4 million Class M-1 at BBB (sf)
-- $17.4 million Class B-1 at BB (low) (sf)
-- $17.1 million Class B-2 at B (low) (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 Certificates reflects 36.75% of credit enhancement provided by subordinated Certificates. The A (high) (sf), A (sf), BBB (sf), BB (low) (sf), and B (low) (sf) ratings reflect 30.40%, 19.55%, 13.25%, 8.35%, and 3.55% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime, expanded prime, and nonprime first-lien residential mortgages to be funded by the issuance of the Mortgage Pass-Through Certificates, Series 2022-1 (the Certificates). The Certificates are backed by 757 mortgage loans with a total principal balance of $355,213,278 as of the Cut-Off Date (July 1, 2022).

The originators for the mortgage pool are Roc Capital Holdings LLC (Roc360; 25.5%), RF Renovo Management Company, LLC (Renovo Originator; 24.2%), 5th Street Capital (5th Street; 16.4%), Logan Finance Corp. (Logan; 16.0%), and other originators, each comprising less than 15.0% of the mortgage loans. Fay Servicing, LLC (Fay; 39.6%), Specialized Loan Servicing LLC (SLS; 36.3%), and RF Mortgage Services Corporation (Renovo Servicer; 24.1%) will service the loans within the pool as of the Closing Date.

The Servicers will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent, contingent upon recoverability determination. Each Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (Servicing Advances). The Servicers will not advance P&I for the payments forborne on the loans where the borrower has been granted forbearance or similar loss mitigation in response to the Coronavirus Disease (COVID-19) pandemic or otherwise. However, the Servicers will be required to make P&I advances for any delinquent payments due after the end of the related forbearance period. If the applicable Servicer fails to make a required P&I advance, the Master Servicer will fund such P&I advance until it is deemed unrecoverable.

Although the mortgage loans, except for the business-purpose investor loans, were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) and 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 QM/ATR rules, 22.6% of the loans are designated as non-QM. Approximately 77.4% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Homeward Opportunities Fund LP (HOF) is the Sponsor, the initial Controlling Holder, and the Servicing Administrator of the transaction. HOF Asset Selector LLC serves as the Asset Selector for securitizations sponsored by HOF and, for this transaction, determined which mortgage loans would be included in the pool. The Sponsor, Depositor, Asset Selector, and Servicing Administrator are affiliates of the same entity.

Computershare Trust Company, N.A. (Computershare; rated BBB with a Stable trend by DBRS Morningstar) will act as the Master Servicer. U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will serve as Trustee, Securities Administrator, Certificate Registrar, and Custodian.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest in at least 5% of the Certificates (the Class B-2, B-3, and X Certificates) issued by the Issuer 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 the earlier of (1) the Distribution date occurring in August 2025 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 Depositor has the option to purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such purchase, the Depositor then has the option to 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 Sponsor will have the option, but not the obligation, to repurchase any mortgage loan (other than loans under forbearance plan as of the Closing Date) that becomes 90 or more days delinquent or are in real estate owned (REO) 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 transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior classes (Class A-1, A-2, and A-3) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). After a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1 certificates before being applied sequentially to amortize the balances of the certificates. For all other classes, principal proceeds can be used to cover interest shortfalls after the more senior tranches are paid in full (IPIP).

Excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to A-3. Of note, interest and principal otherwise available to pay the Class B-3 interest and interest shortfalls may be used to pay the Class A Cap Carryover amounts. In addition, the Class A-1, A-2, and A-3 coupons step up by 1.00% after the payment date in August 2026 (step-up date). Also, the interest rate on Class B-2 drops to 0.00% from the Net WAC Rate on the step-up date, which helps to increase the amount of interest available to pay the stepped-up coupon on the Class A-1, A-2, and A-3 Certificates.

Coronavirus Impact
The coronavirus pandemic and the resulting isolation measures caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the coronavirus, 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 coronavirus, the option to forbear 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 (LTVs), 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.

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

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: June 2022 Update, dated June 29, 2022.

The ratings reflect transactional strengths that include the following:
-- Robust loan attributes and pool composition,
-- Substantial Borrower Equity,
-- Improved underwriting standards,
-- Compliance with the ATR rules, and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:
-- Investor Debt Service Coverage Ratio Loans;
-- Nonprime, Non-QM, and Investor Loans;
-- Representations and Warranties Framework;
-- Three-Month Servicer Advances of Delinquent P&I; and
-- Servicer’s financial capability.

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

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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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