DBRS Morningstar Assigns Provisional Ratings to Towd Point Mortgage Trust 2020-3

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the Asset-Backed Securities, Series 2020-3 (the Notes) to be issued by Towd Point Mortgage Trust 2020-3 (TPMT 2020-3 or the Trust) as follows:

-- $1.0 billion Class A1A at AAA (sf)
-- $179.5 million Class A1B at AAA (sf)
-- $89.2 million Class A2 at AA (sf)
-- $68.1 million Class M1 at A (sf)
-- $58.4 million Class M2 at BBB (sf)
-- $35.7 million Class B1 at BB (sf)
-- $25.9 million Class B2 at B (sf)
-- $1.2 billion Class A1 at AAA (sf)
-- $89.2 million Class A2A at AA (sf)
-- $89.2 million Class A2AX at AA (sf)
-- $89.2 million Class A2B at AA (sf)
-- $89.2 million Class A2BX at AA (sf)
-- $68.1 million Class M1A at A (sf)
-- $68.1 million Class M1AX at A (sf)
-- $68.1 million Class M1B at A (sf)
-- $68.1 million Class M1BX at A (sf)
-- $58.4 million Class M2A at BBB (sf)
-- $58.4 million Class M2AX at BBB (sf)
-- $58.4 million Class M2B at BBB (sf)
-- $58.4 million Class M2BX at BBB (sf)
-- $1.3 billion Class A3 at AA (sf)
-- $1.4 billion Class A4 at A (sf)
-- $1.4 billion Class A5 at BBB (sf)

Classes A2AX, A2BX, M1AX, M1BX, M2AX, and M2BX are interest-only notes. The class balances represent a notional amount.

Classes A1, A2A, A2AX, A2B, A2BX, M1A, M1AX, M1B, M1BX, M2A, M2AX, M2B, M2BX, A3, A4, and A5 are exchangeable notes. These classes can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) ratings on the Notes reflect 26.20% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 20.70%, 16.50%, 12.90%, 10.70%, and 9.10% 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 seasoned performing and reperforming primarily first-lien mortgages funded by the issuance of the Notes. The Notes are backed by 12,585 loans with a total principal balance of $1,643,121,756 as of the Statistical Calculation Date (May 31, 2020).

The portfolio is approximately 149 months seasoned, and 55.3% of the loans are modified. The modifications happened more than two years ago for 90.7% of the modified loans. Within the pool, 2,656 mortgages have non-interest-bearing deferred amounts, which equate to approximately 3.7% of the total principal balance. There are no Home Affordable Modification Program and proprietary principal forgiveness amounts included in the deferred amounts.

As of the Statistical Calculation Date, 94.3% of the pool is current, 3.7% is 30 days delinquent under the Mortgage Bankers Association (MBA) delinquency method, and 2.1% is in bankruptcy (all bankruptcy loans are performing or 30 days delinquent). Approximately 72.9% of the mortgage loans have been zero times 30 days delinquent for at least the past 24 months under the MBA delinquency method.

The majority of the pool (88.5%) is exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules. The loans subject to the ATR rules are designated as QM Safe Harbor (10.1%), QM Rebuttable Presumption (0.2%), and non-QM (1.2%).

FirstKey Mortgage, LLC (FirstKey) will acquire the loans from various transferring trusts on or prior to the Closing Date. The transferring trusts acquired the mortgage loans between December 2013 and June 2020 and are beneficially owned by funds managed by affiliates of Cerberus Capital Management, L.P. Upon acquiring the loans from the transferring trusts, FirstKey, through a wholly owned subsidiary, Towd Point Asset Funding, LLC (the Depositor), will contribute loans to the Trust. As the Sponsor, FirstKey, through a majority-owned affiliate, will acquire and retain a 5% eligible vertical interest in each class of securities to be issued (other than any residual certificates) to satisfy the credit risk retention requirements. These loans were originated and previously serviced by various entities through purchases in the secondary market.

The loans will be serviced by Select Portfolio Servicing, Inc. (97.6%) and Specialized Loan Servicing LLC (2.4%). The initial aggregate servicing fee for the TPMT 2020-3 portfolio will be 0.1736% per annum, lower than transactions backed by similar collateral. DBRS Morningstar stressed such servicing expenses in its cash flow analysis to account for a potential fee increase in a distressed scenario.

There will not be any advancing of delinquent principal or interest on any mortgages by the servicers or any other party to the transaction; however, the servicers are obligated to make advances in respect of homeowner association fees, taxes, and insurance; installment payments on energy improvement liens; and reasonable costs and expenses incurred in the course of servicing and disposing of properties.

FirstKey, as the Asset Manager, has the option to sell certain nonperforming loans or real estate owned (REO) properties to unaffiliated third parties individually or in bulk sales. Bulk sales require an asset sale price to at least equal a minimum reserve amount of the product of (1) 62.03% and (2) the current principal amount of the mortgage loans or REO properties as of the bulk sale date.

When the aggregate pool balance of the mortgage loans is reduced to less than 30.0% of the Cut-Off Date balance, the holders of more than 50% of the Class X Certificates will have the option to cause the Issuer to sell all of its remaining property (other than amounts in the Breach Reserve Account) to one or more third-party purchasers so long as the aggregate proceeds meet a minimum price.

When the aggregate pool balance is reduced to less than 10% of the balance as of the Cut-Off Date, the majority representative as appointed by the holder(s) of more than 50% of the notional amount of the Class X Certificates or their affiliates, may purchase all of the mortgage loans, REO properties, and other properties from the Issuer so long as the aggregate proceeds meet a minimum price.

The transaction employs a sequential-pay cash flow structure. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M1 and more subordinate bonds will not be paid from principal proceeds until the Class A1A, A1B, and A2 Notes are retired.

For this transaction, unlike previous TPMT reperforming loan (RPL) deals, the representations and warranties (R&W) framework incorporates only a realized loss event or enforceability event review trigger. A delinquency trigger, which was in prior TPMT RPL deals, was removed from this transaction. In addition, the R&W framework removes the delinquency component from the calculation of a threshold event. The absence of the delinquency component in both the review trigger and the threshold event may prolong the length of time before a loan is reviewed for a potential breach of R&W. Because the TPMT RPL shelf has a long history of transactions with no R&W putbacks and the deal incorporates a comprehensive third-party due diligence review, DBRS Morningstar deems this change acceptable.

CORONAVIRUS DISEASE (COVID-19) IMPACT
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 meaningfully.

RPL is a traditional RMBS asset class that consists of securitizations backed by pools of seasoned performing and reperforming residential home loans. Although borrowers in these pools may have experienced delinquencies in the past, the loans have been largely performing for the past six to 24 months since issuance. Generally, these pools are highly seasoned and contain sizable concentrations of previously modified loans.

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 RPL 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 RPL asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans that were previously delinquent, recently modified, or have higher updated loan-to-value ratios (LTVs) may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

In addition, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, mandates that all mortgagors with government-backed mortgages be allowed to delay at least 180 days of monthly payments (followed by another period of 180 days if the mortgagor requests it). For loans not subject to the CARES Act, servicers may still provide payment relief to borrowers who report financial hardship related to coronavirus. Within this pool, although not subject to the CARES Act, 2.4% of the borrowers are on coronavirus-related forbearance or deferral plans. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends.

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) no servicing advances on delinquent P&I. These assumptions include the following:

1. Increased delinquencies for the first 12 months at the AAA (sf) and AA (sf) rating levels.
2. Increased delinquencies for the first nine months at the A (sf) and below rating levels.
3. No voluntary prepayments for the first 12 months for the AAA (sf) and AA (sf) rating levels.
4. No liquidation recovery for the first 12 months for the AAA (sf) and AA (sf) rating levels.

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 DBRS Morningstar ratings of AAA (sf) and AA (sf) address the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related notes. The DBRS Morningstar ratings of A (sf), BBB (sf), BB (sf), and B (sf) address the ultimate payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related notes.

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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