DBRS Morningstar Finalizes Provisional Ratings on CFMT 2020-AB1, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Asset-Backed Notes, Series 2020-1 issued by CFMT 2020-AB1, LLC (the Issuer):

-- $247.1 million Class A at AAA (sf)
-- $12.4 million Class M1 at AA (sf)
-- $12.3 million Class M2 at A (sf)
-- $6.0 million Class M3 at BBB (sf)
-- $8.0 million Class M4 at BB (low) (sf)

The AAA (sf) rating reflects 90.3% of cumulative advance rate. The AA (sf), A (sf), BBB (sf), and BB (low) (sf) ratings reflect 94.8%, 99.3%, 101.5%, and 104.4% of cumulative advance rate, 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 (1) if the borrower dies, (2) if the borrower sells the related residence, (3) if the borrower no longer occupies the related residence for a period (usually a year), (4) if it is no longer the borrower’s primary residence, (5) if a tax or insurance default occurs, or (6) if the borrower fails to properly maintain the related residence. In addition, borrowers must be current on any homeowner’s 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 July 31, 2020, cut-off date, the collateral has approximately $273.7 million in unpaid principal balance (UPB) from 1,056 active 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 1996 and 2016. Of the total loans, 662 have a fixed interest rate (67.9% of the balance), with a 5.06% weighted-average coupon (WAC). The remaining 394 loans have floating-rate interest (32.1% of the balance) with a 2.00% WAC, bringing the entire collateral pool to a 4.08% WAC.

As of the cut-off date, the loans in this transaction are all performing. However, all these loans are insured by the U.S. 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 (LTV) ratio but rather the weighted-average (WA) effective LTV adjusted for HUD insurance, which is 46.9% 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 coupon caps at 2%.

The Class M1, M2, M3, and M4 notes have principal lockout terms insofar as they are not entitled to principal payments upon the Issuer's failure to pay all interest (including any cap carryover amount), principal, and fees due on the mandatory call date (this period is known as the Class M Principal Lockout Period). The Class M Principal Lockout Period begins on the day following the mandatory call date and ends on the earliest of (1) the occurrence of a sufficient proceeds auction, (2) an acceleration event, and (3) the ninth anniversary of the mandatory call date. If the Class M Principal Lockout Period ends before the occurrence of a sufficient proceeds auction or an acceleration event, then amounts will be paid in accordance with the priority of payments. Note that the DBRS Morningstar cash flow as it pertains to each note models the first payment being received after these dates for each of the respective notes; hence, at the time of issuance, DBRS Morningstar does not expect these rules to affect the natural cash flow waterfall.

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: September Update,” dated September 10, 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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