DBRS Morningstar Assigns Provisional Ratings to Classic RMBS Trust, Series 2021-2

DBRS Limited (DBRS Morningstar) assigned provisional ratings to the Mortgage Pass-Through Notes, Series 2021-2 to be issued by Classic RMBS Trust (the Issuer) as follows:

-- AAA (sf) to the Class A Mortgage Pass-Through Notes, Series 2021-2 (the Class A Notes)
-- AA (low) (sf) to the Class B Mortgage Pass-Through Notes, Series 2021-2 (the Class B Notes; together with the Class A Notes, the Rated Notes)

The finalization of the ratings is contingent upon receipt of final documents conforming to information already received by DBRS Morningstar.

The Class Z Mortgage Pass-Through Notes, Series 2021-2 are not rated by DBRS Morningstar.

DBRS Morningstar considered the following factors in its analysis described below, each of which include additional analysis and, where appropriate, adjustments to expected performance assumptions as a result of the global efforts to contain the spread of the Coronavirus Disease (COVID-19). For the ratings assigned, DBRS Morningstar’s analysis considered the baseline macroeconomic scenarios for rated sovereign economies, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns,” published on September 8, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect DBRS Morningstar’s view that, although the coronavirus remains a risk to the outlook, uncertainty around the macroeconomic effects of the pandemic has gradually receded. Current median forecasts considered in the baseline macroeconomic scenarios incorporate some risks associated with further outbreaks, but they remain fairly positive on recovery prospects given expectations of continued fiscal and monetary policy support. The policy response to the coronavirus may nonetheless bring other risks to the forefront in the coming months and years. For details, see https://www.dbrsmorningstar.com/research/384150.

DBRS Morningstar considered the following factors in its analysis:

(1) The high level of credit enhancement provided by subordination (15% and 5% initial subordination for the Class A Notes and Class B Notes, respectively).

(2) A bankruptcy-remote structure that provides increasing enhancement to the Rated Notes as principal is repaid sequentially. Additional protections include a Servicing Reserve Account and excess collections that are directed toward repayment of the Rated Notes upon the occurrence of a Trigger Event.

(3) The collateral comprises a pool of approximately $500.1 million first-lien fixed-rate uninsured Canadian residential mortgages with a weighted-average loan-to-value ratio of 69.8% and a weighted-average credit score of 740 (the Mortgage Pool), in each case, as of the Cut-Off Date. The Mortgage Pool also benefits from 20 months of seasoning since initial origination and excludes defaulted or delinquent mortgages and mortgages that were under deferral plans since the later of its origination date and latest renewal date. All of the loans in the Mortgage Pool are originated and serviced by Home Trust Company (Home Trust).

(4) The mortgages are underwritten manually with verified income and full appraisal, are in compliance with Home Trust's underwriting guidelines and Residential Mortgage Underwriting Policy, as in effect at the time of origination, and are in accordance with the Office of the Superintendent of Financial Institutions’ Guideline B-20, as in effect at the time of origination.

(5) An independent third-party due-diligence firm conducted credit, renewal, payment history, data integrity, and property valuation reviews, as applicable, on 22.3% of the loans in the pool (by loan count as of the Cut-Off Date). The results of the reviews were satisfactory.

DBRS Morningstar uses the Canadian residential mortgage-backed securities (RMBS) model that calculates estimated default frequency (more than 90 days in arrears), loss severity, and expected loss on a loan-level basis. The RMBS model output does not include the risk of mortgage default at maturity (i.e., balloon risk). Balloon risk is considered to be low in this transaction because of the strong asset quality, proven refinancing liquidity during the financial crisis, and structural features for loans that are not renewed at maturity. If a loan has not been renewed within the Mortgage Pool or renewed or refinanced with Home Trust or any other lender prior to its maturity date and remains unpaid on its maturity date, the Servicer (or a Replacement Servicer) will extend the maturity date of the mortgage up to six months at a rate equal to the greater of the mortgage rate as of the Cut-Off Date or the Seller’s prevailing posted mortgage rate at the time of the extension, in order to prevent the mortgage from becoming delinquent or defaulted at maturity. To assess balloon risk, DBRS Morningstar nevertheless considers the probability of no lender liquidity at the end of the loan tenure and a hypothetical percentage of loan defaults as a result of nonrenewal. The balloon risk is in addition to the credit risk estimated by the RMBS model. When determining the loss severity of loans that default as a result of nonrenewal, as such borrowers have been current on their mortgage payments and the timing of default is known, DBRS Morningstar considers scheduled mortgage payments and a certain level of house price appreciation during the mortgage term. After taking the balloon risk into account, DBRS Morningstar’s analysis indicates that the 15% initial credit enhancement available to the Class A Notes provides substantial protection compared with the total expected loss under a AAA (sf) stress.

With the RMBS model results and adjustment for balloon risk, DBRS Morningstar runs a proprietary cash flow engine that incorporates the transaction structure and assumptions for timing of default, interest rates, and prepayments. The result was that the Rated Notes, with the proposed structure, could withstand each stress scenario with no loss. The Issuer’s ability to repay interest and principal of the Rated Notes is consistent with the respective ratings.

The Seller and Servicer, Home Trust, is rated BBB (low) and R-2 (middle) with Stable trends by DBRS Morningstar as of March 26, 2021. It is a federally regulated trust company with $22.8 billion of loans under administration as at June 2021.

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 Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Residential Mortgages, Home Equity Lines of Credit and Reverse Mortgages (November 3, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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 Research 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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