DBRS Morningstar Assigns Provisional Ratings to Homeward Opportunities Fund Trust 2020-2

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage Pass-Through Certificates, Series 2020-2 (the Certificates) to be issued by Homeward Opportunities Fund Trust 2020-2 (HOF 2020-2 or the Trust):

-- $372.6 million Class A-1 at AAA (sf)
-- $48.9 million Class A-2 at AA (sf)
-- $61.4 million Class A-3 at A (sf)
-- $34.9 million Class M-1 at BBB (sf)
-- $36.8 million Class B-1 at BB (sf)
-- $29.0 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 40.25% of credit enhancement provided by subordinated Certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 32.40%, 22.55%, 16.95%, 11.05%, and 6.40% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime, expanded prime, and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 1,241 mortgage loans with a total principal balance of $623,530,282 as of the Cut-Off Date (June 1, 2020).

The originators for the mortgage pool are 5th Street Capital, Inc. (24.9%), Sprout Mortgage Corporation (19.0%), Sharestates (18.3%), and other originators that each comprise less than 15.0% of the mortgage loans. Fay Servicing, LLC (58.2%); Specialized Loan Servicing LLC (26.5%); Lima One Capital, LLC (12.0%); and RF Renovo Management Company, LLC (3.3%) will service all loans within the pool.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) 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, 39.3% of the loans are designated as non-QM. Approximately 60.6% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules. One loan in the pool is classified as QM Safe Harbor.

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

Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Negative trend by DBRS Morningstar) will act as the Master Servicer. U.S. Bank National Association (rated AA (high) with a Negative 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 (Class X Certificates) issued by the Issuer, 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 Distribution date occurring in June 2023 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 (other than loans under forbearance plan as of the Closing Date) that becomes 90 or more days delinquent or are in 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.

Unlike the prior HOF non-QM securitizations, with the exception of HOF I 2020-1, the Servicers funded advances of delinquent principal and interest (P&I) on loans that up to 180 days delinquent, for this transaction, the Servicers will only fund advances for 30 days of delinquent P&I. The Servicers, however, are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties. The one-month advancing mechanism may significantly increase the probability of periodic interest shortfalls in the current economic environment affected by the Coronavirus Disease (COVID-19). As a large number of borrowers seek forbearance on their mortgages in the coming months, P&I collections may be reduced meaningfully.

Unlike the prior HOF non-QM (or traditional non-QM) securitizations, with the exception of HOF I 2020-1, which incorporate a pro rata feature among the senior tranches, this transaction employs a sequential-pay cash flow structure across the entire capital stack. Principal proceeds can be used to cover interest shortfalls on the Certificates as the more senior Certificates are paid in full. Furthermore, excess spread can be used to cover realized losses and prior period bond writedown amounts first before being allocated to unpaid cap carryover amounts to Class A-1 up to Class B-1.

The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many residential mortgage-backed securities (RMBS) asset classes; some will likely be affected meaningfully.

The non-QM sector is a traditional RMBS asset class that consists of securitizations backed by pools of residential home loans that may fall outside the CFPB ATR rules, which became effective on January 10, 2014. Non-QM loans encompass the entire credit spectrum. They range from high-FICO, high-income borrowers who opt for interest-only or higher debt-to-income ratio mortgages, to near-prime debtors who have had certain derogatory pay histories but were cured more than two years ago, to nonprime borrowers whose credit events were only recently cleared, among others. In addition, some originators offer alternative documentation or bank statement underwriting to self-employed borrowers in lieu of verifying income with Form W-2, Wage and Tax Statement or tax returns. Finally, foreign nationals and real estate investor programs, while not necessarily non-QM in nature, are often included in non-QM pools.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies, loans on forbearance plans, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020), for the non-QM asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than it previously used. DBRS Morningstar derives such MVD assumptions through a fundamental home price approach based on the forecast unemployment rates and GDP growth outlined in the moderate scenario. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the non-QM asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value ratio (LTV) borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with prior credit events have exhibited difficulties in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Self-employed borrowers are potentially exposed to more volatile income sources, which could lead to reduced cash flows generated from their businesses. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and therefore slower prepayments. In addition, certain pools with elevated geographic concentrations in densely populated urban metropolitan statistical areas may experience additional stress from extended lockdown periods and the slowdown of the economy.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020, 11.1% of the borrowers are on forbearance plans because the borrowers reported financial hardship related to coronavirus. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends. The Servicer, in collaboration with the Servicing Administrator, is generally offering borrowers a three-month payment forbearance plan. At the end of the forbearance period with respect to COVID-19 Mortgage Loans, the related Servicer will seek to obtain from any mortgagor who cannot repay related forborne amounts in full, a package of employment, financial, and credit information. The related Servicer, in collaboration with the Servicing Administrator, may offer a repayment plan or other forms of payment relief, such as deferrals of the unpaid P&I amounts or a loan modification, in addition to pursuing other loss mitigation options.

For this transaction, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower P&I collections and (2) limited servicing advances on delinquent P&I. These assumptions include:
(1) Increasing delinquencies for the AAA (sf) and AA (sf) rating levels for the first 12 months,
(2) Increasing delinquencies for the A (sf) and below rating levels for the first nine months,
(3) Applying no voluntary prepayments for the AAA (sf) and AA (sf) rating levels for the first 12 months, and
(4) Delaying the receipt of liquidation proceeds for the AAA (sf) and AA (sf) rating levels for the first 12 months.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: “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.

The ratings reflect transactional strengths that include the following:
-- Robust loan attributes and pool composition,
-- Satisfactory third-party due diligence review,
-- Improved underwriting standards, and
-- Compliance with the ATR rules.

The transaction also includes the following challenges:
-- Borrowers on forbearance plans,
-- One-month servicer advances of delinquent P&I,
-- Representations and warranties framework,
-- Certain nonprime, non-QM, and investor loans,
-- Servicer’s financial capability, and
-- High loan amounts.

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

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 RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 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.

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@dbrsmorningstar.com.

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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