DBRS Morningstar Finalizes Provisional Ratings on Towd Point Mortgage Trust 2021-SJ2

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the Asset-Backed Securities, Series 2021-SJ2 (the Notes) issued by Towd Point Mortgage Trust 2021-SJ2 (TPMT 2021-SJ2) as follows:

-- $374.6 million Class A1A at AAA (sf)
-- $25.4 million Class A1B at AAA (sf)
-- $20.3 million Class A2 at AA (low) (sf)
-- $400.0 million Class A1 at AAA (sf)
-- $374.6 million Class A1C at AAA (sf)
-- $374.6 million Class A1CX at AAA (sf)
-- $374.6 million Class A1D at AAA (sf)
-- $374.6 million Class A1DX at AAA (sf)
-- $25.4 million Class A1E at AAA (sf)
-- $25.4 million Class A1EX at AAA (sf)
-- $25.4 million Class A1F at AAA (sf)
-- $25.4 million Class A1FX at AAA (sf)
-- $420.3 million Class A3 at AA (low) (sf)
-- $20.3 million Class A2A at AA (low) (sf)
-- $20.3 million Class A2AX at AA (low) (sf)
-- $20.3 million Class A2B at AA (low) (sf)
-- $20.3 million Class A2BX at AA (low) (sf)

Classes A1CX, A1DX, A1EX, A1FX, A2AX, and A2BX are interest-only (IO) notes. The class balances represent notional amounts.

Classes A1, A1C, A1CX, A1D, A1DX, A1E, A1EX, A1F, A1FX, A3, A2A, A2AX, A2B, and A2BX are exchangeable notes and can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) and AA (low) (sf) ratings reflect credit enhancements of 29.10% and 25.50%, respectively, provided by subordinated notes in the pool.

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

This transaction is a securitization of a portfolio of seasoned performing and reperforming junior (second or more subordinate) lien residential mortgage loans and revolving home equity lines of credit (HELOCs) funded by the issuance of the Notes. The Notes are backed by 9,771 (a subset of the Statistical Calculation Date pool) with a total principal balance of $564,182,072 as of the Cut-Off Date (November 30, 2021).

DBRS Morningstar was provided with the Statistical Calculation Date pool. The Statistical Calculation Date pool has 9,998 loans with a total principal balance of $581,615,362. Unless specified otherwise, all the statistics regarding the mortgage loans in this report are based on the Statistical Calculation Date (October 31, 2021).

Approximately 41.7% of the loans in the TPMT 2021-SJ2 pool will be transferred to the Issuer on the Closing Date by causing early redemption of certain prior TPMT SJ and TPHT securitizations. The remaining 58.3% of the loans will be acquired by the Sponsor prior to the Closing Date from various trusts and will be transferred to the Issuer through the chain of transfers.

The transaction includes seasoned junior-lien performing and reperforming mortgages, which represent 86.7% of the pool and have collateral attributes and performance history generally similar to the loans included in previously issued TPMT SJ securitizations. First- and junior-lien HELOCs, approximately 13.2% of the pool, have characteristics somewhat comparable with those included in the previous TPHT securitizations. The remaining approximately 0.1% of the pool comprises seasoned first-lien performing and reperforming mortgages, which have collateral attributes and performance history generally similar to the loans included in previously issued TPMT seasoned reperforming loan securitizations.

HELOC loans generally have a draw period during which borrowers may make draws up to a credit limit, which would result in increased loan balances. The first-lien loans in this securitization are generally able to draw until the maturity date of the loan but, after 10 years, the available credit limit is reduced by an equal amount over the next 20 years. The junior-lien loans in this securitization generally have a 10-year draw period and a repayment period of 15 or 20 years. During the repayment period, borrowers are no longer allowed to draw. In addition, their monthly principal payments during the repayment period will equal an amount that allows the outstanding loan balance to evenly amortize down over the repayment period. During the draw period, borrowers for the first- and junior-lien loans are generally required to make accrued and unpaid interest payments only. Please refer to Appendix 7 of the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” for the applicable analytics used to estimate expected losses for HELOCs.

The portfolio is approximately 172 months seasoned, and a significant number of the loans (41.9%) is modified compared with previous junior-lien transactions on this shelf. The modifications happened more than two years ago for 97.6% of the modified loans. Within the pool, 1,159 mortgages have non-interest-bearing deferred amounts, equating to 5.9% of the total principal balance. About 4.5% of the loans by balance have been modified under the Home Affordable Modification Program (HAMP). There are no HAMP or proprietary principal forgiveness amounts included in the deferred amounts.

As of the Statistical Calculation Date, 100.0% of the pool is current under the Mortgage Bankers Association (MBA) delinquency method, including 0.3% in bankruptcy. Approximately 93.3%, 82.5%, and 72.6% of the mortgage loans have been zero times 30 days delinquent (0 x 30) for at least the past 12 months, 24 months, and 36 months, respectively, under the MBA delinquency method.

As of the Statistical Calculation Date, approximately 96.0% of the loans are exempt from the Qualified Mortgage (QM)/Ability-to-Repay rules. Approximately 4.0% of the loans are Non-QM.

Specialized Loan Servicing LLC (SLS) will service 70.7% of the pool, and Select Portfolio Servicing, Inc. will service 29.3% of the pool. Servicer write-ups, which include details on the servicing practices, can be found in the report.

For this transaction, any junior-lien loan that is 150 days delinquent under the Office of Thrift Supervision delinquency method (equivalent to 180 days delinquent under the MBA delinquency method) and is not a forbearance mortgage loan will be considered a Charged Off Loan. With respect to a Charged Off Loan the total unpaid principal balance will be considered a realized loss and will be allocated reverse sequentially to the Noteholders. If there are any subsequent recoveries for such Charged Off Loans, the recoveries will be included in the principal remittance amount and applied in accordance with the principal distribution waterfall; in addition, any class principal balances of Notes that had been previously reduced by allocation of such realized losses may be increased by such recoveries sequentially in order of seniority. DBRS Morningstar’s analysis assumes no recoveries upon default on any junior-lien loans in this pool.

For the HELOC loans, this transaction uses a structural mechanism similar to the one used in the previously issued TPHT transaction to fund future draw requests. As the initial servicer of all HELOC loans, SLS is obligated to fund draws and is entitled to reimburse itself for such draws prior to any payments on the Notes first from the related principal collections of the mortgage loans it services and then from all principal collections. If the aggregate draws exceed the principal collections (Net Draw), then SLS can request reimbursement from amounts on deposit in the variable-funding account (VFA), which has an initial balance of $250,000. On each monthly Payment Date, the holder of the Class D Certificates is required to deposit an amount equal to any unreimbursed Net Draws into the VFA. The principal balance of the Class D Certificates will increase by any Net Draws funded using amounts in the VFA.

The transaction employs a sequential-pay cash flow structure, similar to prior TPMT SJ securitizations. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M1 and more subordinate bonds will not be paid from principal proceeds until the more senior classes are retired.

There will be no advancing of delinquent principal or interest on any mortgages by the related servicer or any other party to the transaction. In addition, the related servicer is not obligated to make advances in respect of homeowner association fees, taxes and insurance, installment payments on energy-improvement liens, and reasonable costs and expenses incurred in the course of servicing and disposing of properties unless a determination is made that there will be material recoveries. SLS, as the initial servicer of all HELOC mortgage loans, is also obligated to fund any monthly Net Draws, as noted above.

A majority-owned affiliate of the Sponsor will acquire and intends to retain a 5% interest in each class of Securities (other than the Class R and Class D Certificates) to satisfy the credit risk retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On (1) the payment date in December 2023; (2) payment dates occurring in any March, May, or August of 2024; or (3) on or after the payment date in December 2024, the call option holder (affiliate of the FirstKey Mortgage, LLC) may, at its option, purchase all of the mortgage loans and the real estate owned (REO) properties so long as the aggregate proceeds from such purchase exceeds the minimum price (Optional Redemption).

On any payment date on or after the first payment date when the aggregate pool balance of the mortgage loans and the REO properties is reduced to less than 30.0% of the Cut-off Date balance, the call option holder will have the option to cause the Issuer to sell all its remaining property (other than amounts in the Breach Reserve Account) so long as the aggregate proceeds meet the minimum price (Bulk Sale Right).

On or after the first payment date on which the aggregate pool balance of the mortgage loans and the REO properties is less than 10% of the aggregate pool balance as of the Cut-off Date, the call option holder will have the option to purchase all the remaining mortgage loans, REO properties, and other property of the Issuer at the minimum price (Optional Clean-up Call).

FirstKey, as the Asset Manager, has the ability to supervise the sale of eligible nonperforming loans, charged-off loans or REO properties to unaffiliated third parties individually or in bulk sales. The sales require an asset sale price or an aggregate sale price, as applicable, to at least equal a minimum reserve amount, as described in the transaction documents.

Coronavirus Disease (COVID-19) Impact
The coronavirus 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 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, delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns December 2021 Update,” dated December 9, 2021.

The ratings reflect transactional strengths that include the following:
-- Loan-to-value ratios.
-- Current loans with relatively strong pay histories.
-- Asset Manager oversight.
-- Strong servicer.

The transaction also includes the following challenges:
-- Representations and warranties standard.
-- Holder of the Class D Certificates may fail to reimburse servicer for draws.
-- Limited third-party due-diligence review.
-- No servicer advances of delinquent principal and interest.
-- Assignments and endorsements.

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

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 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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