DBRS Morningstar Finalizes Provisional Ratings on Homeward Opportunities Fund I Trust 2019-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2019-3 (the Certificates) issued by Homeward Opportunities Fund I Trust 2019-3 (HOF I 2019-3 or the Trust):

-- $263.5 million Class A-1 at AAA (sf)
-- $27.3 million Class A-2 at AA (sf)
-- $48.9 million Class A-3 at A (sf)
-- $24.9 million Class M-1 at BBB (sf)
-- $19.9 million Class B-1 at BB (sf)
-- $15.8 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 Class A-1 Certificates reflects 35.90% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 29.25%, 17.35%, 11.30%, 6.45% and 2.60% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate, prime, expanded prime and non-prime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 590 mortgage loans with a total principal balance of $411,111,003 as of the Cut-Off Date (November 1, 2019).

The originators for the underlying mortgage pool are Sprout Mortgage Corporation (Sprout; 67.2%); 5th Street Capital, Inc. (30.3%); and various other originators, each comprising less than 2.0% of the mortgage loans. Specialized Loan Servicing LLC (53.8%) and Fay Servicing, LLC (46.2%) will service all loans within the pool.

The Sprout mortgages were originated under the following programs:

(1) Income Per Bank Statements (46.2%) — Generally made to self-employed borrowers using bank statements to support self-employed income for qualification purposes.

(2) Jumbo Special Feature (17.7%) — Generally made to borrowers with loan amounts exceeding the government-sponsored enterprise (GSE) loan limits who may fall outside the Qualified Mortgage (QM) requirements based on debt-to-income or loans that have special features that do not meet GSE guidelines.

(3) Asset Depletion (3.3%) — Generally made to borrowers with significant assets equal to 110% or more of the original mortgage balance.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s QM and 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. In accordance with the QM/ATR rules, 1.3% of the loans are designated as QM Safe Harbor and 90.5% as non-QM. Approximately 8.2% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

The HOF I 2019-3 pool has no debt servicing coverage ratio loans leading to lower proportion of investor loans within the pool when compared with previous Homeward Opportunities Fund deals. This transaction also has loans that exhibit high balances. Loans with original balance greater than $3 million account for 16.1% of the pool balance.

Homeward Opportunities Fund I LP (HOF I) is the Sponsor and the Servicing Administrator of the transaction. HOF I Asset Selector LLC serves as the Asset Selector for securitizations sponsored by HOF I and, for this transaction, determined which mortgage loans would be included in the pool. The Sponsor, Depositor, Administrator, Asset Selector and Servicing Administrator are affiliates or the same entity.

Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS Morningstar) will act as the Master Servicer. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will serve as Trustee, Securities Administrator, Certificate Registrar and Custodian.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest in at least 5% of the Certificates (Classes B-2, B-3 and X Certificates) issued by the Trust, to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

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, the Depositor has the option to purchase all outstanding Certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such purchase, the Depositor then has the option to 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 Sponsor will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent or are real estate owned 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 Servicers will fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent. The Servicers are also obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties.

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 Certificates as the outstanding senior Certificates are paid in full. Furthermore, excess spread can be used to cover realized losses first before being allocated to unpaid cap carryover amounts up to Class B-1.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition,
-- Satisfactory third-party due diligence review,
-- Improved underwriting standards,
-- Compliance with the ATR rules and
-- Current loans and faster prepayments.

The transaction also includes the following challenges:

-- Representations and warranties framework and provider;
-- Certain non-prime, non-QM and investor loans;
-- Servicer advances of delinquent principal and interest,
-- Servicer’s financial capability and
-- High loan amounts.

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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