DBRS Morningstar Finalizes Provisional Ratings on PRKCM 2023-AFC1 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2023-AFC1 (the Notes) issued by PRKCM 2023-AFC1 Trust (the Trust):

-- $292.8 million Class A-1 at AAA (sf)
-- $48.8 million Class A-2 at AA (high) (sf)
-- $64.9 million Class A-3 at A (high) (sf)
-- $30.6 million Class M-1 at BBB (high) (sf)
-- $23.4 million Class B-1 at BB (sf)
-- $18.4 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 Notes reflects 41.15% of credit enhancement provided by subordinated Notes. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (sf), and B (sf) ratings reflect 31.35%, 18.30%, 12.15%, 7.45%, and 3.75% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate, expanded prime and nonprime first-lien residential mortgages funded by the issuance of the Mortgage-Backed Notes, Series 2023-AFC1 (the Notes). The Notes are backed by 1,004 mortgage loans with a total principal balance of $497,493,256 as of the Cut-Off Date (February 1, 2023).

AmWest Funding Corp. (AmWest) is the Originator and Servicer for the mortgage pool. DBRS Morningstar conducted a telephone review of AmWest’s origination and servicing platforms and believes the company is an acceptable mortgage loan originator and servicer.

This is the fifth securitization by the Sponsor, Park Capital Management Sponsor LLC, an affiliate of the Seller, the Originator, and the Servicer, which are the same entity.

The pool is about four months seasoned on a weighted-average basis, although seasoning may span from one month to 39 months. All loans in the pool are current as of the Cut-Off Date.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) and Ability-to-Repay (ATR) rules where applicable, 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, approximately 47.0% of the loans are designated as non-QM.

Approximately 52.7% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules. The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on the property-level cash flows for approximately 31.2% of the loans, and mortgagor’s credit profile and debt-to-income ratio, property value, and the available assets, where applicable, for approximately 21.4% of the loans. Since the loans were made to investors for business purposes, they are exempt from the CFPB ATR rules and TILA/RESPA Integrated Disclosure rule.

For investor loans originated to investors under debt service coverage ratio (DSCR) programs (31.2% of the pool), lenders use property-level cash flow or the DSCR to qualify borrowers for income. The DSCR is typically calculated as market rental value (validated by an appraisal report) divided by the principal, interest, taxes, insurance, and association dues (PITIA).

Also, approximately 16.1% of the pool comprises residential investor loans underwritten to the property-focused underwriting guidelines. The loans were underwritten to program guidelines for business-purpose loans where the lender generally expects the property (or its value) and the borrower assets to be the primary source of repayment. The lender reviews the mortgagor's credit profile, though it does not rely on the borrower's income to make its credit decision.

For this transaction, the Servicer will fund advances of delinquent principal and interest (P&I) until loans become 180 days delinquent or are otherwise deemed unrecoverable. Additionally, the 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 (Servicing Advances). If the Servicer fails in its obligation to make P&I advances, the Master Servicer (Nationstar Mortgage LLC) will be obligated to fund such advances. In addition, if the Master Servicer fails in its obligation to make P&I advances, Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) as the Paying Agent, will be obligated to fund such advances. The Master Servicer and Paying Agent are responsible only for P&I Advances; the Servicer is responsible for P&I Advances and Servicing Advances.

The Sponsor, directly or indirectly through a majority-owned affiliate, is expected to retain an eligible horizontal residual interest consisting of a portion of the Class B-2 Notes, the Class B-3 Notes, and the Class 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 any date on or after the earlier of (1) the payment date occurring in February 2026 or (2) on or after the payment date when the aggregate stated principal balance of the mortgage loans is reduced to less than or equal to 20% of the Cut-Off Date balance, the Sponsor may terminate the Issuer (Optional Termination) by purchasing the loans, any real estate owned (REO) properties, and any other property remaining in the Issuer at the optional termination price, specified in the transaction documents. After such a purchase, the Sponsor will have to complete a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds to the appropriate holders of regular or residual interests.

The Controlling Holder in the transaction is a majority holder (or majority holders if there is no single majority holder) of the outstanding Class XS Notes, initially, the Seller. The Controlling Holder will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent under the Mortgage Banker Association (MBA) Method (or in the case of any mortgage loan that has been subject to a forbearance plan related to the impact of the Coronavirus Disease (COVID-19) pandemic, on any date from and after the date on which such loan becomes 90 or more days delinquent under the MBA Method from the end of the forbearance period) 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 payment among the Class A-1, A-2, and A-3 Notes (senior classes of Notes) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Credit Event). Also, principal proceeds can be used to cover interest shortfalls on the senior classes of Notes (IIPP) before being applied sequentially to amortize the balances of the Notes. For the Class A-3 Notes (only after a Credit Event) and for the mezzanine and subordinate classes of notes, principal proceeds can be used to cover interest shortfalls after the more senior tranches are paid in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to Class A-3 Notes. Of note, the interest and principal otherwise available to pay the Class B-3 Notes interest and interest shortfalls may be used to pay the Class A coupons' Cap Carryover Amounts on any payment date.

The transaction assumptions consider DBRS Morningstar's baseline macroeconomic scenarios for rated sovereign economics, available in its commentary “Baseline Macroeconomic Scenarios for Rated Sovereigns: December 2022 Update,” dated December 21, 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;
-- Robust loan attributes and pool composition;
-- Compliance with the ATR rules; and
-- Comprehensive third-party due-diligence review.

The transaction also includes the following challenges:
-- Alternative documentation loans and loans to self-employed borrowers;
-- Nonprime, non-QM, and investor loans;
-- Representations and warranties framework;
-- Servicer’s financial capability; and
-- Six-month advances of delinquent P&I.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 applicable to the ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020; https://www.dbrsmorningstar.com/research/359116).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (May 4, 2020),
https://www.dbrsmorningstar.com/research/360574/assessing-us-rmbs-pools-under-the-ability-to-repay-rules

-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
https://www.dbrsmorningstar.com/research/366613/third-party-due-diligence-criteria-for-us-rmbs-transactions

-- Representations and Warranties Criteria for U.S. RMBS Transactions (April 22, 2020),
https://www.dbrsmorningstar.com/research/359902/representations-and-warranties-criteria-for-us-rmbs-transactions

-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

-- Operational Risk Assessment for U.S. RMBS Originators (November 23, 2022),
https://www.dbrsmorningstar.com/research/405664/operational-risk-assessment-for-us-rmbs-originators

-- Operational Risk Assessment for U.S. RMBS Servicers (November 23, 2022),
https://www.dbrsmorningstar.com/research/405665/operational-risk-assessment-for-us-rmbs-servicers

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.