DBRS Morningstar Finalizes Provisional Ratings on RMF Buyout Issuance Trust 2020-2

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following Asset-Backed Notes issued by RMF Buyout Issuance Trust 2020-2:

-- $269.3 million Class A at AAA (sf)
-- $21.7 million Class M1 at AA (sf)
-- $19.9 million Class M2 at A (sf)
-- $17.5 million Class M3 at BBB (sf)
-- $15.7 million Class M4 at BB (sf)

The AAA (sf) rating reflects 27.42% of credit enhancement. The AA (sf), A (sf), BBB (sf), and BB (sf) ratings reflect 21.57%, 16.21%, 11.50%, and 7.27% of credit enhancement, respectively.

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

Lenders typically offer reverse mortgage loans to people who are at least 62 years old. Through reverse mortgage loans, borrowers have access to home equity through a lump sum amount or a stream of payments without periodically repaying principal or interest, allowing the loan balance to accumulate over a period of time until a maturity event occurs. Loan repayment is required (i) if the borrower dies, (ii) if the borrower sells the related residence, (iii) if the borrower no longer occupies the related residence for a period (usually a year), (iv) if it is no longer the borrower’s primary residence, (v) if a tax or insurance default occurs, or (vi) if the borrower fails to properly maintain the related residence. In addition, borrowers must be current on any homeowners association dues if applicable. Reverse mortgages are typically nonrecourse; borrowers don’t have to provide additional assets in cases where the outstanding loan amount exceeds the property’s value (the crossover point). As a result, liquidation proceeds will fall below the loan amount in cases where the outstanding balance reaches the crossover point, contributing to higher loss severities for these loans.

As of the April 30, 2020, cut-off date, the collateral has approximately $371.1 million in unpaid principal balance (UPB) from 1,464 nonperforming home equity conversion mortgage reverse mortgage loans secured by first liens typically on single-family residential properties, condominiums, multifamily (two- to four-family) properties, manufactured homes, and planned unit developments. The loans were originated between May 2005 and December 2019. Of the total loans, 743 have a fixed interest rate (57.3% of the balance), with a 5.3% weighted-average coupon (WAC). The remaining 721 loans have floating-rate interest (42.7% of the balance) with a 3.2% current WAC, bringing the entire collateral pool to a 4.4% WAC.

All the loans in this transaction are nonperforming (i.e., inactive) loans. There are 624 loans that are referred for foreclosure (44.5% of the balance), 120 are in bankruptcy status (9.6%), 242 are called due following recent maturity (16.7%), 193 are real estate owned (12.4%), and the remaining 285 (16.8%) are in default. However, all these loans are insured by the United States Department of Housing and Urban Development (HUD), which mitigates losses vis-à-vis uninsured loans. Because the insurance supplements the home value, the industry metric for this collateral is not the loan-to-value ratio (LTV) but rather the weighted-average (WA) effective LTV adjusted for HUD insurance, which is 59.8% for these loans. To calculate the WA LTV, DBRS Morningstar divides the UPB by the maximum claim amount and the asset value.

The transaction uses a sequential structure. No subordinate note shall receive any principal payments until the senior notes (Class A notes) have been reduced to zero. This structure provides credit enhancement in the form of subordinate classes and reduces the effect of realized losses. These features increase the likelihood that holders of the most senior class of notes will receive regular distributions of interest and/or principal. All note classes have available funds caps.

For more information regarding rating methodologies and the Coronavirus Disease (COVID-19), please see the following DBRS Morningstar publications: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and Global Macroeconomic Scenarios: June Update, dated June 1, 2020.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is U.S. Reverse Mortgage Securitization Ratings Methodology (May 8, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.

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

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