DBRS Morningstar Finalizes Provisional Ratings on Verus Securitization Trust 2023-5

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2023-5 (the Notes) to be issued by Verus Securitization Trust 2023-5 (VERUS 2023-5 or the Trust):

-- $333.8 million Class A-1 at AAA (sf)
-- $47.1 million Class A-2 at AA (sf)
-- $37.0 million Class A-3 at A (sf)
-- $27.4 million Class M-1 at BBB (sf)
-- $32.2 million Class B-1 at BB (low) (sf)
-- $13.4 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 34.15% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (sf), BB (low) (sf), and B (low) (sf) ratings reflect 24.85%, 17.55%, 12.15%, 5.80%, and 3.15% 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 2023-5 (the Notes). The Notes are backed by 958 mortgage loans with a total principal balance of $506,880,917 as of the Cut-Off Date (June 1, 2023).

The pool was originated by Hometown Equity Mortgage, LLC (19.7%) as well as various other originators (80.3%), each contributing less than 10.0% of the loans to the Trust. Shellpoint Mortgage Servicing will act as the Servicer for all 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, 50.5% of the loans are designated as non-QM, 6.2% are designated as QM Rebuttable Presumption, and 2.3% are designated as QM Safe Harbor. Approximately 41.1% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Approximately 27.5% of the loans were originated under a Property Focused Investor Loan Debt Service Coverage Ratio (DSCR) program and 0.5% were originated under a Property Focused Investor Loan program. Certain loans (14.2%) within the DSCR program had DSCR less than 1.00 times. Both programs allow for property cash flow/rental income to qualify borrowers for income.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical interest, which represents at least 5% of the aggregate 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. Additionally, as of the Closing Date, the Sponsor is expected to initially retain 100% of the Classes B-3, A-IO-S, XS, and DA Notes.

On or after the earlier of (1) the Payment Date occurring in June 2026 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 Administrator, at the Optional Redemption Right Holder's option, may redeem all of the outstanding Notes at a price equal to the greater of (A) the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts and (B) the class balances of the related Notes less than 90 days delinquent with accrued unpaid interest plus fair market value of the loans 90 days or more delinquent and real estate-owned properties. After such purchase, the Depositor must 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 Advancing Party will fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent. The Advancing Party has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. The Servicer, however, is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.

This transaction incorporates a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches, subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). Prior to a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1, A-2, and A-3 before being applied sequentially to amortize the balances of the senior and subordinate Notes. After a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 sequentially (IIPP). For more Subordinated Notes, principal proceeds can be used to cover interest shortfalls as the more Senior Notes are paid in full. Furthermore, excess spread can be used to cover realized losses and prior period bond writedown amounts first before being allocated to unpaid cap carryover amounts to Class A-1 down to Class M-1.

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary: “Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 Update,” dated April 28, 2023. 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:

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

The transaction also includes the following challenges:

-- Certain nonprime, Non-QM, and investor loans;
-- Representations and warranties framework;
-- Three-month advances of delinquent P&I; and
-- Advancing Party’s financial capability.

The full description of the strengths, challenges, and mitigating factors is detailed in the related Rating 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 (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 (March 3, 2023; https://www.dbrsmorningstar.com/research/410473).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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 (April 28, 2023),
https://www.dbrsmorningstar.com/research/413297/assessing-us-rmbs-pools-under-the-ability-to-repay-rules
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://www.dbrsmorningstar.com/research/415687/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 (May 16, 2023),
https://www.dbrsmorningstar.com/research/414076/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.