DBRS Morningstar Finalizes Provisional Ratings on Spruce Hill Mortgage Loan Trust 2020-SH1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2020-SH1 (the Notes) issued by Spruce Hill Mortgage Loan Trust 2020-SH1 (the Trust):

-- $178.1 million Class A-1 at AAA (sf)
-- $22.9 million Class A-2 at AA (high) (sf)
-- $40.3 million Class A-3 at A (sf)
-- $21.4 million Class M-1 at BBB (sf)
-- $16.0 million Class B-1 at BB (sf)
-- $12.4 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 40.55% of credit enhancement provided by subordinated Notes in the pool. The AA (high) (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 32.90%, 19.45%, 12.30%, 6.95%, and 2.80% 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 fixed- and adjustable-rate prime and non-prime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 1,003 loans with a total principal balance of $299,652,359 as of the Cut-Off Date (January 1, 2020). The mortgage loans were originated by Carrington Mortgage Services, LLC.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s Qualified Mortgage (QM) and 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 QM/ATR rules, 84.4% of the loans are designated as non-QM, 0.3% as QM-Safe Harbor, and 7.4% as QM-Rebuttable Presumption. Approximately 8.0% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of the Class B-3 and Class XS Notes, representing at least 5% 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 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 Administrator, at the Issuer’s option, may redeem all 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 sum of the principal balances on the underlying mortgage loans. 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 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. Furthermore, excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts up to Class B-2.

The ratings reflect transactional strengths that include the following:

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

The transaction also includes the following challenges:

-- Representations and warranties framework and provider;
-- Non-prime, QM Rebuttable Presumption, or non-QM loans;
-- Servicer advances of delinquent principal and interest; and
-- Servicing Administrator’s financial capability.

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