DBRS Morningstar Assigns Provisional Ratings to RMF Buyout Issuance Trust 2020-HB1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Asset-Backed Notes to be issued by RMF Buyout Issuance Trust 2020-HB1:

-- $360.0 million Class A1 at AAA (sf)
-- $32.8 million Class A2 at AAA (sf)
-- $392.8 million Class AB at AAA (sf)
-- $22.7 million Class M1 at AA (sf)
-- $19.9 million Class M2 at A (sf)
-- $8.8 million Class M3 at BBB (sf)
-- $5.3 million Class M4 at BB (sf)

Class AB is an exchangeable note. This class can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) rating reflects 12.62% of credit enhancement. The AA (sf), A (sf), BBB (sf), and BB (sf) ratings reflect 7.57%, 3.14%, 1.18%, 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 (July 31, 2020), the collateral has approximately $449.5 million in unpaid principal balance (UPB) from 1,878 performing and nonperforming home equity conversion mortgage (HECM) reverse mortgage assets secured by first liens typically on single-family residential properties, condominiums, multifamily (two- to four-family) properties, manufactured homes, and planned unit developments. The assets were originated between September 2003 and October 2017. Of the total loans, 642 have a fixed interest rate (35.6%% of the balance), with a 5.06% weighted-average coupon (WAC). The remaining 1,236 loans have floating-rate interest (64.4% of the balance) with a 2.19% WAC, bringing the entire collateral pool to a 3.21% WAC.

As of the Cut-Off Date, the loans in this transaction are both performing and nonperforming (i.e., inactive) loans. There are 739 nonperforming assets comprising 36.9% of the total UPB. Among the nonperforming loans, there are 302 loans that are referred for foreclosure (15.5% of the balance), 32 are in bankruptcy status (1.3%), 158 are called due following recent maturity (8.7%), 79 are real estate owned (REO; 3.8%), and the remaining 168 (7.7%) are in default. However, all these loans are insured by the United States Department of Housing and Urban Development (HUD), which mitigates losses vis-à-vis uninsured loans. See discussion in the Analysis section below. Because the insurance supplements the home value, the industry metric for this collateral is not the loan-to-value ratio (LTV) but rather the WA effective LTV adjusted for HUD insurance, which is 51.9% for the loans in this pool. To calculate the WA LTV, DBRS Morningstar divides the UPB by the maximum claim amount and the asset value.

The remaining 1,139 performing assets comprise 63.1% of the total UPB. Among the performing, assignable loans, 747 (40.3% of the total UPB) are flagged to be assigned to HUD, the “Intended Assignment” set, and 392 (22.8% of the total UPB) are flagged to be held, not assigned, the “Strategically Held” set.

The transaction includes a 24-month revolving period wherein cash flow, after current interest and fees are paid, can be redeployed to purchase new loans to replace liquidated, paid off, or assigned collateral. Unused cash would be released to the notes' principal. After the 24-month period, the pool becomes static.

The transaction uses a sequential structure. No subordinate note shall receive any principal payments until the senior notes (Class A1 and A2 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 classes of notes will receive regular distributions of interest and/or principal. All note classes pay current interest and have available funds caps.

The Class A1 and A2 Notes are pro-rata and exchangeable for Class AB Notes.

The Class M Notes have principal lockout terms as they are not entitled to principal payments until the Senior Notes have been paid off.

All Notes are subject to a mandatory call date on October 2025. Failure of the deal to be called by this date will be considered an Event of Default. If there is an Event of Default, the subordinate bonds will cease to receive interest and the interested will be directed to the Senior Notes. Note that 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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