DBRS Morningstar Finalizes Provisional Ratings on Verus Securitization Trust 2021-8

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgaged-Backed Notes, Series 2021-8 (the Notes) issued by Verus Securitization Trust 2021-8 (the Trust):

-- $293.1 million Class A-1 at AAA (sf)
-- $28.3 million Class A-2 at AA (high) (sf)
-- $45.6 million Class A-3 at A (high) (sf)
-- $21.6 million Class M-1 at BBB (sf)
-- $16.2 million Class B-1 at BB (high) (sf)
-- $16.2 million Class B-2 at B (sf)

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

The AAA (sf) rating on the Class A-1 Notes reflects 32.25% of credit enhancement provided by subordinate notes. The AA (high) (sf), A (high) (sf), BBB (sf), BB (high) (sf), and B (sf) ratings reflect 25.70%, 15.15%, 10.15%, 6.40%, and 2.65% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of primarily fixed- and adjustable-rate, expanded prime and nonprime, first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 836 mortgage loans with a total principal balance of $432,619,746 as of the Cut-Off Date (December 1, 2021).

The top originator for the mortgage pool is Athas Capital Group, Inc. (14.2%). The remaining originators each comprise less than 10.0% of the mortgage loans. Within the pool, 94.4% loans within the pool are serviced by Shellpoint Mortgage Servicing. Approximately 3.7% of the loans are serviced by Fay Servicing, LLC and the remaining 1.9% are serviced by Specialized Loan Servicing LLC (SLS).

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the Qualified Mortgage (QM)/ATR rules, 52.2% of the loans are designated as non-QM, and 0.3% are designated as QM Rebuttable Presumption. Approximately 47.5% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Approximately 38.1% of the loans were originated under a Property Focused Investor Loan Debt Service Coverage Ratio (DSCR) program and 3.1% were originated under a Property Focused Investor Loan program. Both programs allow for property cash flow/rental income to qualify borrowers for income.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical interest, representing at least 5% of the Notes, to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On or after the earlier of (1) the Payment Date occurring in December 2024 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Administrator, at the Issuer’s option, may redeem all of the outstanding Notes at a price equal to the greater of (a) the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts and (b) the class balances of the related Notes less than 90 days delinquent with accrued unpaid interest plus fair market value of the loans 90 days or more delinquent and real estate-owned properties. After such purchase, the Depositor must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

The Principal and Interest (P&I) Advancing Party or Servicer (for loans serviced by SLS) will fund advances of delinquent P&I on any mortgage until such loan becomes 90 days delinquent. The P&I Advancing Party or Servicer has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. The Servicers, however, are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.

This transaction incorporates a sequential-pay cash flow structure with a pro rata feature among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 Certificates sequentially after a Trigger Event. For more subordinated Notes, principal proceeds can be used to cover interest shortfalls as the more senior Notes are paid in full. Furthermore, excess spread can be used to cover realized losses and prior period bond writedown amounts first before being allocated to unpaid cap carryover amounts to Class A-1 down to B-2.

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 coronavirus 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 forebear 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 (LTV) 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.

As of the Cut-Off Date, there are no loans that are subject to an active coronavirus-related forbearance plan with the Servicer.

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:

-- Robust loan attributes and pool composition.
-- Satisfactory third-party due-diligence review.
-- Improved underwriting standards.

The transaction also includes the following challenges:

-- Certain nonprime, non-QM, and investor loans.
-- The representations and warranties framework.
-- Three-month advances of delinquent P&I.
-- The P&I Advancing Party’s financial capability.

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