DBRS Morningstar Assigns Provisional Ratings to Mello Mortgage Capital Acceptance 2021-MTG1

DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Mortgage Pass-Through Certificates, Series 2021-MTG1 (the Certificates) to be issued by Mello Mortgage Capital Acceptance 2021-MTG1 (MELLO 2021-MTG1):

-- $325.6 million Class A1 at AAA (sf)
-- $325.6 million Class A2 at AAA (sf)
-- $325.6 million Class A3 at AAA (sf)
-- $244.2 million Class A4 at AAA (sf)
-- $244.2 million Class A5 at AAA (sf)
-- $244.2 million Class A6 at AAA (sf)
-- $81.4 million Class A7 at AAA (sf)
-- $81.4 million Class A8 at AAA (sf)
-- $81.4 million Class A9 at AAA (sf)
-- $260.4 million Class A10 at AAA (sf)
-- $260.4 million Class A11 at AAA (sf)
-- $260.4 million Class A12 at AAA (sf)
-- $65.1 million Class A13 at AAA (sf)
-- $65.1 million Class A14 at AAA (sf)
-- $65.1 million Class A15 at AAA (sf)
-- $16.3 million Class A16 at AAA (sf)
-- $16.3 million Class A17 at AAA (sf)
-- $16.3 million Class A18 at AAA (sf)
-- $37.9 million Class A19 at AAA (sf)
-- $37.9 million Class A20 at AAA (sf)
-- $37.9 million Class A21 at AAA (sf)
-- $363.5 million Class A22 at AAA (sf)
-- $363.5 million Class A23 at AAA (sf)
-- $363.5 million Class A24 at AAA (sf)
-- $363.5 million Class AX1 at AAA (sf)
-- $325.6 million Class AX2 at AAA (sf)
-- $325.6 million Class AX3 at AAA (sf)
-- $325.6 million Class AX4 at AAA (sf)
-- $244.2 million Class AX5 at AAA (sf)
-- $244.2 million Class AX6 at AAA (sf)
-- $244.2 million Class AX7 at AAA (sf)
-- $81.4 million Class AX8 at AAA (sf)
-- $81.4 million Class AX9 at AAA (sf)
-- $81.4 million Class AX10 at AAA (sf)
-- $260.4 million Class AX11 at AAA (sf)
-- $260.4 million Class AX12 at AAA (sf)
-- $260.4 million Class AX13 at AAA (sf)
-- $65.1 million Class AX14 at AAA (sf)
-- $65.1 million Class AX15 at AAA (sf)
-- $65.1 million Class AX16 at AAA (sf)
-- $16.3 million Class AX17 at AAA (sf)
-- $16.3 million Class AX18 at AAA (sf)
-- $16.3 million Class AX19 at AAA (sf)
-- $37.9 million Class AX20 at AAA (sf)
-- $37.9 million Class AX21 at AAA (sf)
-- $37.9 million Class AX22 at AAA (sf)
-- $363.5 million Class AX23 at AAA (sf)
-- $363.5 million Class AX24 at AAA (sf)
-- $363.5 million Class AX25 at AAA (sf)
-- $5.4 million Class B1 at AA (sf)
-- $5.4 million Class B1A at AA (sf)
-- $5.4 million Class BX1 at AA (sf)
-- $7.5 million Class B2 at A (low) (sf)
-- $7.5 million Class B2A at A (low) (sf)
-- $7.5 million Class BX2 at A (low) (sf)
-- $3.4 million Class B3 at BBB (low) (sf)
-- $1.1 million Class B4 at BB (low) (sf)
-- $574.0 thousand Class B5 at B (sf)

Classes AX1, AX2, AX3, AX4, AX5, AX6, AX7, AX8, AX9, AX10, AX11, AX12, AX13, AX14, AX15, AX16, AX17, AX18, AX19, AX20, AX21, AX22, AX23, AX24, AX25, BX1, and BX2 are interest-only certificates. The class balances represent notional amounts.

Classes A1, A2, A3, A4, A5, A7, A8, A9, A10, A11, A12, A13, A14, A16, A17, A19, A20, A22, A23, A24, AX2, AX3, AX4, AX5, AX8, AX9, AX10, AX11, AX12, AX13, AX14, AX17, AX20, AX23, AX24, AX25, B1, and B2 are exchangeable certificates. These classes can be exchanged for combinations of exchange certificates as specified in the offering documents.

Classes A1, A2, A3, A4, A5, A6, A7, A8, A9, A10, A11, A12, A13, A14, A15, A16, A17, and A18 are super-senior certificates. These classes benefit from additional protection from the senior support certificates (Classes A19, A20, and A21) with respect to loss allocation.

The AAA (sf) ratings on the Certificates reflect 5.10% of credit enhancement provided by subordinated certificates. The AA (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (sf) ratings reflect 3.70%, 1.75%, 0.85%, 0.55%, and 0.40% of credit enhancement, respectively.

Other than the classes specified above, DBRS Morningstar does not rate any other classes in this transaction.

This securitization is a portfolio of first-lien fixed-rate prime conventional residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 576 loans with a total principal balance of $383,005,628 as of the Cut-Off Date (March 1, 2021).

MELLO 2021-MTG1 is the third prime securitization issued from the MELLO shelf MTG series and comprises fully amortizing fixed-rate mortgages with original terms to maturity of primarily 30 years. The first two MELLO deals were issued in 2018 and consisted of a combination of nonagency and agency-eligible prime collateral. Unlike those first two securitizations, all loans in the MELLO 2021-MTG1 pool are conforming, high-balance mortgage loans which were underwritten by loanDepot.com, LLC (loanDepot) using an automated underwriting system designated by Fannie Mae or Freddie Mac and were eligible for purchase by such agencies. In addition, the pool contains a large concentration of loans (50.0%) that were granted appraisal waivers by the agencies. In its analysis, DBRS Morningstar applied property value haircuts to such loans, which increased the expected losses on the collateral.

loanDepot is the Originator, Seller, and Servicing Administrator of the mortgage loans, and Artemis Management LLC is the Sponsor of the transaction. LD Holdings Group LLC, the parent company of the Sponsor and Seller, will serve as Guarantor with respect to the remedy obligations of the Seller. LDPMF LLC, a subsidiary of the Sponsor and an affiliate of the Seller, will act as Depositor of the transaction.

Cenlar FSB will act as the Servicer. Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Negative trend by DBRS Morningstar) will act as the Master Servicer and Securities Administrator. Wilmington Savings Fund Society, FSB will serve as Trustee, and Deutsche Bank National Trust Company will serve as Custodian.

The transaction employs a senior-subordinate, shifting-interest cash flow structure that is enhanced from a pre-crisis structure.

As of the Cut-Off Date, no borrower within the pool has entered into a Coronavirus Disease (COVID-19)-related forbearance plan with a servicer. In the event a borrower requests or enters into a forbearance plan after the Closing Date, such loan will remain in the pool.

Coronavirus Pandemic 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 securities (RMBS) asset classes, some meaningfully.

The prime mortgage sector is a traditional RMBS asset class that consists of securitizations backed by pools of residential home loans originated to borrowers with prime credit. Generally, these borrowers have decent FICO scores, reasonable equity, and robust income and liquid reserves.

As a result of the coronavirus, DBRS Morningstar has seen increased delinquencies and loans on forbearance plans, and expects 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: January 2021 Update,” published on January 28, 2021), for the prime asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than it previously used. DBRS Morningstar derives 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 prime asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that this sector should have low intrinsic credit risk. Within the prime asset class, loans originated to (1) self-employed borrowers or (2) higher loan-to-value ratio (LTV) borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. 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.

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: January 2021 Update,” dated January 28, 2021.

The ratings reflect transactional strengths that include high-quality credit attributes, well-qualified borrowers, structural enhancements, satisfactory third-party due-diligence review, and 100% current loans.

The ratings reflect transactional weaknesses that include loans with agency appraisal waivers, certain aspects of the representations and warranties framework, an issuer with limited securitization history, and the servicing administrator’s financial capabilities.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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