DBRS Morningstar Assigns Provisional Ratings to CFMT 2021-HB5, LLC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Asset-Backed Notes, Series 2021-1, to be issued by CFMT 2021-HB5, LLC:

-- $614.0 million Class A at AAA (sf)
-- $50.7 million Class M1 at AA (low) (sf)
-- $37.0 million Class M2 at A (low) (sf)
-- $35.5 million Class M3 at BBB (low) (sf)
-- $12.3 million Class M4 at BB (sf)

The AAA (sf) rating reflects 18.1% of credit enhancement. The AA (low) (sf), A (low) (sf), BBB (low) (sf), and BB (sf) ratings reflect 11.3%, 6.4%, 1.6%, and 0.0% 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 (December 31, 2020), the collateral has approximately $749.5 million in unpaid principal balance (UPB) from 3,295 nonperforming home equity conversion mortgage 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 originally originated between 1995 and 2016. Of the total loans, 60 have a fixed interest rate (2.01% of the balance), with a 5.01% weighted-average coupon (WAC). The remaining 3,235 loans have floating-rate interest (97.99% of the balance) with a 1.81% WAC, bringing the entire collateral pool to a 1.88% WAC.

All the assets in this transaction are nonperforming (i.e., inactive) loans. There are 1,377 assets that are referred for foreclosure (45.3% of balance), 114 are in bankruptcy (3.4%), 867 are called due (26.8%), 56 are real estate owned (1.6%), 880 are in default (22.9%), and one loan with a pending claim. However, all these assets 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 55.9% for these loans. The WA LTV is calculated by dividing the UPB by the maximum claim amount plus 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 fund caps.

The Class M notes have principal lockout terms insofar as they are not entitled to principal payments until after the expected final payment of the upstream notes. Available cash will be trapped until these dates at which stage the notes will start to receive payments. Specifically, Classes M1, M2, M3, and M4 are locked out until November 2023, March 2024, May 2024, and July 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 likely 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: January 2021 Update,” dated January 28, 2021.

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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