DBRS Morningstar Finalizes Provisional Ratings on Ajax Mortgage Loan Trust 2021-E

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Mortgage-Backed Notes, Series 2021-E (the Notes) issued by Ajax Mortgage Loan Trust 2021-E (the Trust or the Issuer):

-- $396.6 million Class A-1 at AAA (sf)
-- $34.2 million Class A-2 at A (sf)
-- $19.4 million Class M-1 at BBB (sf)
-- $17.9 million Class B-1 at BB (sf)
-- $20.5 million Class B-2 at B (sf)

The AAA (sf) rating on the Notes reflects 23.40% of credit enhancement provided by subordinated certificates. The A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 16.80%, 13.05%, 9.60%, and 5.65% of credit enhancement, respectively.

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

The Trust is a securitization of a portfolio of seasoned performing and reperforming first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 3,142 loans with a total principal balance of $517,741,210 as of the Cut-Off Date (May 31, 2021).

The mortgage loans are approximately 167 months seasoned. For 15.7% of the pool, DBRS Morningstar received more recent payment status as of June 7, and used these in its analysis. As of the Cut-Off Date or June 7 where applicable, approximately 90.9% of the loans are current under the Mortgage Bankers Association delinquency method, including 59 bankruptcy-performing loans. Below is the current delinquency status distribution for this pool.

Although the number of months clean (consecutively zero times 30 (0 x 30) days delinquent) at issuance is weaker relative to other DBRS Morningstar-rated seasoned transactions, the borrowers in this pool demonstrate reasonable cash flow velocity (as by number of payments over time) in the past six, 12, and 24 months.

The portfolio contains 87.6% modified loans. The modifications happened more than two years ago for 93.5% of the modified loans. Within the pool, 1,032 mortgages (42.6% of the pool) have non-interest-bearing deferred amounts of $49,272,810, which equate to approximately 9.5% of the total principal balance.

The mortgage loans were previously included in prior securitizations issued by the Sellers, Ajax Mortgage Loan Trust 2020-C and Ajax Mortgage Loan Trust 2020-D. The issuers of the prior securitizations will exercise certain loan sale rights, and, on the Closing Date, the mortgage loans will be conveyed by each Seller to the Depositor.

To satisfy the credit risk retention requirements, Great Ajax Operating Partnership L.P. (Ajax or the Sponsor) or a majority-owned affiliate of the Sponsor will retain at least a 5% eligible vertical interest in the securities (except for the Class R Notes).

Gregory Funding LLC is the Servicer for the entire pool and will not advance any delinquent principal and interest on the mortgages; however, the Servicer is obligated to make advances in respect of prior liens, insurance, real estate taxes and assessments, as well as reasonable costs and expenses incurred in the course of servicing and disposing of properties.

Since 2013, Ajax and its affiliates have issued 42 securitizations under the Ajax Mortgage Loan Trust shelf prior to AJAX 2021-E. These issuances were backed by seasoned loans, reperforming loans (RPL), or nonperforming loans and are mostly unrated by DBRS Morningstar. DBRS Morningstar reviewed the historical performance of the Ajax shelf; however, the nonrated deals generally exhibit worse collateral attributes than the rated deals with regard to delinquencies at issuance. The prior nonrated Ajax transactions generally exhibit relatively high levels of delinquencies and losses as compared with the rated Ajax securitizations, which are expected given the nature of these severely distressed assets.

The Issuer has the option to redeem the Notes in full at a price equal to the remaining note amount of the rated Notes plus accrued and unpaid interest, including any Step-Up Interest Payment Amounts, and any unpaid expenses and reimbursement amounts. Such Note Redemption Rights may be exercised on any date
-- Beginning three years after the Closing Date at the direction of the Depositor or
-- Beginning on the payment date in July 2026 at the direction of the either the Depositor or holders of more than 50.0% of Class B-3 Notes.

The transaction employs a sequential-pay cash flow structure. Principal proceeds can be used to pay interest and Cap Carryover Amounts on the Notes, but such interest and Cap Carryover Amounts on Class A-2 and more subordinate bonds will not be paid from the principal remittance amount until the more senior classes are retired. In addition, unique to this shelf, the senior and mezzanine classes are entitled to Step-Up Interest Payments, beginning eight years from the Closing Date.

In contrast to prior DBRS Morningstar-rated Ajax-seasoned RPL securitizations, the representations and warranties (R&W) framework for this transaction incorporates the following new features:
-- A pool level review trigger that delays potential breach reviews, similar to many other rated RPL securitizations;
-- The absence of a repurchase remedy by the Sponsor (except for the real estate mortgage investment conduit representation), dissimilar to other rated RPL securitizations; and
-- A Breach Reserve Account, which will be available to satisfy losses related to R&W breaches. Such account is unfunded upfront and then funds from monthly excess cash flow at the bottom of the interest remittance waterfall, dissimilar to other rated RPL securitizations.

Although these updates weaken the R&W framework, the historical experience of having minimal putbacks and comprehensive third-party due diligence for the shelf mitigates these features. In addition, the cash flow structure allows sufficient excess spread to fully fund the Breach Reserve Account within four months under DBRS Morningstar cash flow scenarios, which is much faster than other rated RPL securitizations.

CORONAVIRUS IMPACT
The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the pandemic, DBRS Morningstar saw an increase in the delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief that may perform very differently from traditional delinquencies. At the onset of the pandemic, the option to forbear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low loan-to-value ratios, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios - June 2021 Update,” published on June 18, 2021), DBRS Morningstar may assume higher loss expectations for pools with loans on forbearance plans.

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 (COVID19)," dated March 20, 2020; and “Global Macroeconomic Scenarios - June 2021 Update,” dated June 18, 2021.

The ratings reflect transactional strengths that include the following:
-- Satisfactory third-party due-diligence review.
-- Seasoning.
-- LTV ratios.
-- Structural features.

The transaction also includes the following challenges:
-- Representations and warranties standard.
-- No servicer advances of delinquent P&I.
-- Assignments and endorsements.

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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