DBRS Morningstar Finalizes Provisional Ratings on Bunker Hill Loan Depositary Trust 2019-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2019-3 (the Notes) issued by Bunker Hill Loan Depositary Trust 2019-3 (BHLD 2019-3 or the Trust):

-- $189.8 million Class A-1 at AAA (sf)
-- $24.9 million Class A-2 at AA (low) (sf)
-- $35.9 million Class A-3 at A (sf)
-- $15.3 million Class M-1 at BBB (sf)
-- $19.9 million Class B-1 at BB (sf)
-- $10.7 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 37.90% of credit enhancement provided by subordinated Notes. The AA (low) (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 29.75%, 18.00%, 13.00%, 6.50% and 3.00% of credit enhancement, respectively.

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 a portfolio of fixed- and adjustable-rate prime and non-prime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 938 loans with a total principal balance of $305,587,629 as of the Cut-Off Date (November 1, 2019).

The transaction structure and the Representations and Warranties (R&W) framework and enforcement mechanism of BHLD 2019-3 is similar to that of BHLD 2019-2 and BHLD 2019-1, deals that Morningstar Credit Ratings, LLC rated earlier in 2019. Compared with BHLD 2019-1 and BHLD 2019-2, the overall collateral characteristics of the pool backing BHLD 2019-3 are weaker. To further differentiate the pools, there are a few characteristics unique to BHLD 2019-3: (1) 26.6% of loans by balance are originated and serviced by A&D Mortgage LLC (A&D), an originator with limited securitization history; (2) a notable share of the collateral (17.3%) comprises loans originated to foreign national or non-resident alien borrowers (foreign borrowers), most of which do not have FICO scores provided by the U.S. credit bureaus; and (3) overall, 17.8% of the collateral are loans to borrowers with no FICO score.

NQM WH REDF2 Seller, LLC, NQM WH TSE Seller, LLC and NQM WH INVESTIN Seller, LLC (the Sellers) are investment funds advised by Oaktree Capital Management, L.P. (Oaktree or the Aggregator) under an indemnification agreement between the funds and Grand Avenue Acquisition Company, LLC (the Sponsor). Oaktree has invested over $4.0 billion of capital since 2008 as an aggregator of performing and non-performing mortgage loans as well as an equity investor in Selene Finance LP, as residential mortgage servicer, and in Genesis Capital LLC (Genesis), an originator of fix and flip loans. Since launching the non-Qualified Mortgage (QM) platform in 2018, Oaktree has acquired over $1.0 billion of residential mortgage loans and issued two non-QM residential mortgage-backed security deals in 2019. The Aggregator’s platform includes several investment funds and separate accounts which make investments in the residential assets, including non-QM loans.

The funds include real estate debt (inception in 2010; $3.2 billion in assets under management (AUM)), real estate income (inception in 2016; $1.2 billion in AUM) and real estate opportunities (inception in 1994; $5.2 billion in AUM). The Aggregator does not use its own underwriting guidelines and generally acquires loans from various approved mortgage originators based on an investment criterion which, among other factors, includes lower borrower loan-to-value ratios and higher credit scores.

Through bulk purchases, Oaktree acquired the mortgage loans from (1) Citadel Servicing Corporation (Citadel or CSC; 65.8%); (2) A&D (26.6%); (3) AmWest Funding Corp. (AmWest; 2.5%); and other originators (5.1%).

Citadel will service approximately 65.8% of the mortgage loans by balance directly or through sub-servicers. A&D will be the servicer of record for approximately 26.6% of the loans and will use Specialized Loan Servicing LLC (SLS) as a sub-servicer to service the loans. SLS will also service approximately 5.2% of the loans and AmWest will service approximately 2.5%.

DBRS Morningstar conducted an aggregator review of Oaktree, an originator and servicer review of CSC, a servicer review of SLS and an originator review of A&D, and deems them to be acceptable.

Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS Morningstar) will act as Master Servicer, Paying Agent, Certificate Registrar, Note Registrar, REMIC Administrator and Custodian. The Bank of New York Mellon will serve as an Indenture Trustee.

Grand Avenue Acquisition Company, LLC will serve as the R&W Provider for approximately 70.8% of the loans by balance. A&D (26.6%) and AmWest (2.5%) will serve as the R&W providers for their respective loans.

Although 49.9% of the mortgage loans by balance were originated to satisfy the Consumer Financial Protection Bureau (CFPB) Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government or private-label non-agency prime jumbo products for various reasons, including but not limited to income documentation requirements, limited credit history, loan size and debt-to-income, a prior housing or credit event or prior mortgage delinquency. Approximately 50.1% of the loans were originated under the programs which are exempt from the ATR rules. In accordance with the CFPB QM rules, 49.9% of the loans are qualified as non-QM and approximately 50.1% of the loans are made to investors for business purposes and are exempt from QM categorization.

The Servicers, except for Citadel, will generally fund advances of delinquent principal and interest (P&I) on any respective mortgage until such loan becomes 180 days delinquent, and they are obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties. Citadel will not be required to make any P&I advances on the loans it services and the Master Servicer will have no obligation to make any P&I Advances for any loans serviced by Citadel. However, all Servicers will be required to pay customary, reasonable and/or necessary expenses incurred in the performance of the servicing obligations, including the mortgagor’s escrow payments.

On or after the earlier of (1) the three-year anniversary of the Closing Date or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, Grand Avenue Depositor, LLC (the Depositor) may, at the direction of the Class XS Noteholders, purchase all outstanding Notes (call the deal) at a price equal to the greater of the sum of (1) outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts, unreimbursed advances, any fees, expenses and indemnification amounts of the transaction parties; and (2) the sum of balance of the mortgage loans plus accrued and unpaid interest thereon and the fair market value of each real estate owned property, less estimated liquidation expenses, unreimbursed advances and fees, expenses and indemnification amounts of the transaction parties. The Depositor may also purchase all of the Notes from the Noteholders (call the deal) at a price equal to the aggregate outstanding Note balance of all classes, accrued and unpaid interest thereon (including any Net Weighted-Average Coupon (Net WAC) cap carryover amounts and step-up interest payment amounts).

If the transaction is not called, on and after the fourth anniversary of the Closing Date, the coupons on the Class A and Class M-1 Notes will step up by up to 100 basis points, but will remain subject to the Net WAC cap. The portion of interest due to the step-up will be paid at the top of the excess cash flow waterfall.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Notes as the outstanding senior Notes are paid in full.

The ratings reflect transactional strengths that include the following:

-- Substantial borrower equity, robust loan attributes and pool composition;
-- Compliance with the ATR rules;
-- Satisfactory third-party due diligence review;
-- Current loans; and
-- Satisfactory performance to date.

The transaction also includes the following challenges:

-- Foreign borrowers with no FICO scores;
-- R&W framework and provider;
-- Non-prime, QM-rebuttable presumption or non-QM loans;
-- Servicers’ advances of delinquent P&I; and
-- Servicers’ financial capability.

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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