DBRS Morningstar Finalizes Provisional Ratings on Nationstar HECM Loan Trust 2020-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Asset-Backed Notes, Series 2020-1 issued by Nationstar HECM Loan Trust 2020-1:

-- $408.1 million Class A at AAA (sf)
-- $34.9 million Class M1 at AA (sf)
-- $33.8 million Class M2 at A (sf)
-- $23.9 million Class M3 at BBB (sf)
-- $15.6 million Class M4 at BB (high) (sf)
-- $2.6 million Class M5 at BB (sf)

The AAA (sf) rating reflects 21.34% of credit enhancement. The AA (sf), A (sf), BBB (sf), BB (high) (sf), and BB (sf) ratings reflect 14.62%, 8.10%, 3.50%, 0.50%, and 0.00% 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 (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 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 Cut-Off Date (August 31, 2020), the collateral has approximately $518.8 million in unpaid principal balance (UPB) from 1,860 nonperforming home equity conversion mortgage (HECM) 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 October 2006 and October 2014. Of the total loans, 1,378 are fixed (76.2% of balance) with a 5.2% weighted-average coupon (WAC). The remaining 482 loans are floating-rate (23.8% of balance) with a 2.5% current coupon bringing the entire collateral pool to a 4.6% WAC.

As of the Cut-Off Date, all the loans in this transaction are nonperforming (i.e., inactive) loans. There are 630 loans that are referred for foreclosure (37.6% of balance), 368 are in bankruptcy status (19.9%), 390 are called due (19.8%), 142 are real estate owned (7.2%), 15 are deed in lieu (0.8%), and the remaining 315 (14.7%) are in default. However, all of these loans are insured by the United States Department of Housing and Urban Development (HUD), and this insurance acts to mitigate 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 60.0% for these loans. The WA LTV is calculated by dividing 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.

The Class M Notes have principal lockout terms insofar as they are not entitled to principal payments until they are in their applicable target amortization period, in which they are entitled to receive fixed scheduled payments and must be paid in full at the end of such target amortization period. Available cash will be trapped until these dates at which stage the class of notes in its target amortization period will start to receive principal payments in their scheduled amounts. Specifically, the Class M1, M2, M3, M4, and M5 Notes are locked out until June 2023, September 2023, December 2023, February 2024, and March 2024, respectively. 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, these rules are not expected 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 the 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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