DBRS Morningstar Assigns Provisional Ratings to Saluda Grade Alternative Mortgage Trust 2022-INV1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the Mortgage Pass-Through Certificates, Series 2022-INV1 (the Certificates) to be issued by Saluda Grade Alternative Mortgage Trust 2022-INV1 (GRADE 2022-INV1 or the Issuer) as follows:

-- $116.0 million Class A-1 at AAA (sf)
-- $11.8 million Class A-2 at AA (sf)
-- $12.4 million Class A-3 at A (sf)
-- $8.4 million Class M-1 at BBB (sf)
-- $5.9 million Class B-1 at BB (sf)
-- $5.6 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 certificates reflects 31.10% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 24.10%, 16.75%, 11.75%, 8.25%, and 4.90% of credit enhancement, respectively.

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

This a securitization of a portfolio of fixed-rate, investor debt service coverage ratio (DSCR), first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 712 mortgage loans (843 properties) with a total principal balance of $168,375,887 as of the Cut-Off Date (November 30, 2022).

GRADE 2022-INV1 represents the first securitization issued by the Sponsor, Saluda Grade Opportunities Fund LLC (Saluda Grade), backed by business purpose investment property loans underwritten using DSCR. The originators for the mortgage pool are Finance of America Mortgage, LLC (59.3%), HouseMax Funding, LLC (17.1%) and other originators, each comprising less than 5.0% of the mortgage loans. Specialized Loan Servicing LLC (63.4%) and Fay Servicing, LLC (36.6%) are the Servicers of the loans in this transaction. U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will act as the Trustee and Securities Administrator. U.S. Bank National Association will act as the Custodian.

The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and the DSCR, where applicable. Because the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s Ability-to-Repay rules and TILA/RESPA Integrated Disclosure rule.

The Sponsor, or an affiliate, will retain a portion of each class of the Certificates (other than the Class R Certificates), representing an eligible vertical interest of at least 5% of the aggregate fair value of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure. Additionally, the Sponsor, or an affiliate, will initially own the Class B-1, B-2, B-3, A-IO-S, X, and P Certificates on the Closing Date.

On or after any date on which the aggregate unpaid principal balance of the mortgage loans is less than or equal to 10% of the Cut-Off Date balance, the Depositor will have the option to redeem the outstanding Certificates at a price equal to par plus accrued interest and any postclosing noninterest-bearing deferred amounts (optional redemption). A qualified liquidation may follow an optional redemption.

The Sponsor or the Depositor will have the option, but not the obligation, to repurchase any mortgage loan that becomes 60 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.
For this transaction, neither Servicer nor any other transaction party will fund advances on delinquent principal and interest (P&I) on any mortgage. However, the Servicers are 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 transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the Class A-1, A-2, and A-3 Certificates 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 and A-2 Certificates before being applied sequentially to amortize the balances of the certificates (IIPP). For all other classes, principal proceeds can be used to cover interest shortfalls after the more senior classes are paid in full (IPIP). In addition, excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover Amounts due to Class A-1.

The transaction assumptions consider DBRS Morningstar's baseline macroeconomic scenarios for rated sovereign economics, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns: September 2022 Update,” dated September 19, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar's moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards,
-- Certain loan attributes,
-- Robust pool composition, and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Investor loans,
-- No servicer advances of delinquent P&I,
-- Representations and warranties framework, and
-- No operational risk review on an originator comprising over 15% of the pool.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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 (May 17, 2022).

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 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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