DBRS Morningstar Finalizes Provisional Ratings on GS Mortgage-Backed Securities Trust 2020-NQM1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2020-NQM1 (the Certificates) issued by GS Mortgage-Backed Securities Trust 2020-NQM1 (GSMBS 2020-NQM1 or the Trust):

-- $216.9 million Class A-1 at AAA (sf)
-- $19.0 million Class A-2 at AA (sf)
-- $19.8 million Class A-3 at A (sf)
-- $15.1 million Class M-1 at BBB (sf)
-- $7.6 million Class B-1 at BB (sf)
-- $5.7 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 24.55% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 17.95%, 11.05%, 5.80%, 3.15%, and 1.15% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of seasoned and newly originated, first-lien, fixed- and adjustable-rate nonprime and expanded prime residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 734 loans with a total principal balance of $302,581,476 as of the Cut-Off Date (August 1, 2020).

The originators for the aggregate mortgage pool are loanDepot.com, LLC (15.4%), Greenbox Loans, Inc. (13.3%), and various other originators, each composing no more than 10.0% of the pool by principal balance. Goldman Sachs Mortgage Company (GSMC) acquired 61.8% of the loans from IRP Asset Securities LLC and Invictus Residential Pooler, L.P. Additionally, GSMC acquired loans from SG Capital Partners LLC (2.5%). GSMC and MTGLQ Investors, L.P. (the Mortgage Loan Sellers) acquired the remainder of the loans directly from the related originators.

The loans are on average more seasoned than a typical new origination non-Qualified Mortgage (non-QM) securitization with a DBRS Morningstar-calculated weighted average loan age of 29 months. In addition, 62.2% of the loans are seasoned 24 months or more. Within the pool, 93.2% of the loans are current and 6.8% are 30 days delinquent. The Coronavirus Disease (COVID-19)-affected loans account for 18.0% of the pool and are described in further detail below.
The Servicers of the loans are Specialized Loan Servicing LLC (58.6%), NewRez LLC doing business as Shellpoint Mortgage Servicing, LLC (31.3%), and Rushmore Loan Management Services LLC (10.1%). Wells Fargo Bank, N.A. (rated AA with a Negative trend by DBRS Morningstar) will act as the Master Servicer, Securities Administrator, and Custodian.

Although the applicable mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime products for various reasons. In accordance with the CFPB's QM/ATR rules, 19.3% of the loans are designated as QM Safe Harbor, 3.8% are designated as QM Rebuttable Presumption, and 56.7% are designated as non-QM. Approximately 20.2% of the loans are made to investors for business purposes and thus are not subject to the QM/ATR rules.

The sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical residual interest consisting of at least 5% of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

The Servicers will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 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.

On or after the earlier of (1) the three-year anniversary of the Closing Date and (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Controlling Holder (majority holder of the Class X Certificates) has the option to purchase all outstanding certificates (Optional Redemption) at a price equal to the outstanding class balance plus accrued and unpaid interest and other amounts as described in the related offering documents. After such purchase, the Controlling Holder then has the option to complete a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds 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 Class A-1 and A-2 Certificates sequentially (IIPP). For more subordinate Certificates, principal proceeds can be used to cover interest shortfalls 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 down to Class B-1.

CORONAVIRUS 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 security (RMBS) asset classes, some 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 of the CFPB’s 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 Statements (W-2s) 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: July Update,” published on July 22, 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 derived 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 pandemic may not occur until a few performance cycles later, DBRS Morningstar generally believes loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value ratio 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, 18.0% of the borrowers had been granted forbearance or deferral plans because the borrowers reported financial hardship related to the coronavirus pandemic. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends. The Servicers are generally offering borrowers a three-month payment forbearance plan and would attempt to contact the borrowers before the expiration of the forbearance period to evaluate the borrowers' capacity to repay the missed amounts. Beginning in month four, the borrower can repay all of the missed mortgage payments at once, extend the forbearance, or opt to go on a repayment plan to catch up on missed payments. During the repayment period, the borrower needs to make regular payments and additional amounts to catch up on the missed payments. As a result, the Servicers may offer 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 deal, 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: July Update,” dated July 22, 2020.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards.
-- Robust loan attributes and pool composition.
-- Satisfactory third-party due-diligence review.
-- Faster prepayments across non-QM.
-- Compliance with the ATR rules.

The transaction also includes the following challenges:

-- Borrowers on forbearance plans.
-- Nonprime, QM rebuttable presumption, non-QM, and investor loans.
-- Servicer advances of delinquent P&I.
-- Representations and warranties framework and providers.

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

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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