DBRS Morningstar Assigns Provisional Ratings to Towd Point Mortgage Trust 2019-SJ3

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the Asset-Backed Securities, Series 2019-SJ3 (the Notes) to be issued by Towd Point Mortgage Trust 2019-SJ3 (the Issuer) as follows:

-- $360.6 million Class A1 at AAA (sf)
-- $360.6 million Class A1A at AAA (sf)
-- $360.6 million Class A1AX at AAA (sf)

Class A1AX is an interest-only note. The class balances represent a notional amount.

Classes A1A and A1AX are exchangeable notes. These classes can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) ratings on the Notes reflect 50.30% of credit enhancement provided by subordinated notes in the pool.

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

This transaction is a securitization of a portfolio of seasoned performing and re-performing junior (second or more subordinate) lien residential mortgages. The Notes are backed by 13,889 loans with a total principal balance of $725,464,528 as of the Cut-Off Date (October 31, 2019).

The portfolio is approximately 158 months seasoned and a significant number of the loans (64.9%) are modified compared with previous junior lien transactions on this shelf. The modifications happened more than two years ago for 84.3% of the modified loans. Within the pool, 2,147 mortgages have non-interest-bearing deferred amounts, which equate to 3.9% of the total principal balance.

As of the Cut-Off Date, 100.0% of the pool is current under the Mortgage Bankers Association (MBA) delinquency method, including 1.8% that is in bankruptcy. Approximately 78.8%, 64.3% and 50.3% of the mortgage loans have been zero times 30 days delinquent for at least the past 12 months, 24 months and 36 months, respectively, under the MBA delinquency method. All but nine of the loans in the pool are exempt from the Qualified Mortgage (QM)/Ability-to-Repay (ATR) rules. The QM/ATR status of the remaining nine loans (0.1% of the pool) is unknown; DBRS Morningstar assumed these loans to be non-QM.

A majority-owned affiliate of the Sponsor, FirstKey Mortgage, LLC, will acquire and intends to retain a 5% interest in each class of securities (other than the Class R Certificates) to satisfy the credit risk retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

Select Portfolio Servicing, Inc. will service 67.5% of the loans and Specialized Loan Servicing LLC will service 32.5% of the loans. Servicer write-ups can be found in the related report, which includes details on the servicing practices of junior liens.

For this junior lien transaction, any loan that is 150 days delinquent under the Office of Thrift Supervision delinquency method (equivalent to 180 days delinquent under the MBA delinquency method) will be considered a Charged Off Loan. With respect to a Charged Off Loan, the total unpaid principal balance will be considered a realized loss and will be allocated reverse sequentially to the Noteholders. If there are any subsequent recoveries for such Charged Off Loans, the recoveries will be included in the principal remittance amount and applied in accordance with the principal distribution waterfall; in addition, any class principal balances of Notes that had been previously reduced by allocation of such realized losses may be increased by such recoveries sequentially in order of seniority. DBRS Morningstar’s analysis assumes no recoveries upon default on any loans in this pool.

The transaction employs a sequential-pay cash flow structure. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M1 and more subordinate bonds will not be paid from principal proceeds until the more senior classes are retired.

There will be no advancing of delinquent principal or interest on any mortgages by the related servicer or any other party to the transaction. In addition, the related servicer is not obligated to make advances in respect of homeowner association fees, taxes and insurance, installment payments on energy-improvement liens and reasonable costs and expenses incurred in the course of servicing and disposing of properties unless a determination is made that there will be material recoveries.

On the payment date in November 2021 and payment dates occurring in any February, May, August or November after the payment date in November 2021, the Issuer may, at its option and upon the direction of the Class X Representative, redeem all outstanding Notes and certificates so long as the aggregate proceeds from such redemption exceeds the minimum price (Issuer Optional Redemption).

On any payment date on or after the first payment date when the aggregate pool balance of the mortgage loans is reduced to less than 30.0% of the Cut-off Date balance, 50.0% of the Class X Certificateholders will have the option to cause the Issuer to sell all its remaining property (other than amounts in the Breach Reserve Account) so long as the aggregate proceeds meet the minimum price (Bulk Sale Right).

On or after the first payment date on which the aggregate pool balance of the mortgage loans and the real estate owned (REO) properties is less than 10% of the aggregate pool balance as of the Cut-off Date, 50% of the Majority Representative will have the option to purchase all the remaining mortgage loans, REO properties and other property of the Issuer at the minimum price (Optional Clean-up Call).

The DBRS Morningstar rating of AAA (sf) addresses the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Notes.

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

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, which can be found on dbrs.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@dbrs.com.

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

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