DBRS Morningstar Finalizes Provisional Ratings on Ajax Mortgage Loan Trust 2022-A

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Mortgage-Backed Securities, Series 2022-A (the Notes) issued by Ajax Mortgage Loan Trust 2022-A (the Trust or the Issuer):

-- $145.0 million Class A-1 at AAA (sf)
-- $6.5 million Class A-2 at AA (sf)
-- $3.4 million Class A-3 at A (sf)
-- $3.8 million Class M-1 at BBB (sf)
-- $16.9 million Class M-2 at BB (sf)
-- $1.1 million Class M-3 at B (sf)

The AAA (sf) rating on the Notes reflects 32.70% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 29.70%, 28.10%, 26.35%, 18.50%, and 18.00% of credit enhancement, respectively.

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

The Trust is a securitization of a portfolio of seasoned performing, reperforming, and nonperforming first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 811 loans with a total principal balance of $215,467,392 as of the Cut-Off Date (February 28, 2022).

In contrast to prior DBRS Morningstar-rated AJAX transactions, AJAX 2022-A comprises a portion of loans that are severely delinquent or in foreclosure as of the Cut-Off Date. In its cash flow analysis, DBRS Morningstar applied nonperforming loan (NPL) stresses to certain loans (Group 2) that are severely delinquent or in foreclosure and not demonstrating a cash flowing pattern. DBRS Morningstar applied reperforming loan (RPL) stresses to the remaining loans (Group 1).

The mortgage loans are approximately 186 months seasoned. Although the number of months clean (consecutively zero times 30 (0 x 30) days delinquent) at issuance for Group 1 (78.2% of the total pool) is weaker relative to other DBRS Morningstar-rated seasoned transactions, the borrowers in Group 1 demonstrate reasonable cash flow velocity (as by number of payments over time) in the past six, 12, and 24 months. The borrowers in Group 2 are currently severely delinquent or in foreclosure and have not demonstrated a consistent cash flow velocity in the last 24 months.

The portfolio contains 91.4% modified loans. The modifications happened more than two years ago for 90.6% of the modified loans. Within the pool, 245 mortgages (25.4% of the pool) have non-interest-bearing deferred amounts of $5,321,766, which equate to approximately 2.5% of the total principal balance.

The mortgage loans were previously included in prior securitizations issued by Great Ajax Operating Partnership L.P. (Ajax or the Sponsor). The Seller will acquire such loans as a result of the exercise of certain note redemption and/or loan sale rights, and, on the Closing Date, the mortgage loans will be conveyed by the Seller to the Depositor.

To satisfy the credit risk retention requirements, the Sponsor or a majority-owned affiliate of the Sponsor will retain at least a 5% eligible vertical interest in the securities.

Gregory Funding LLC is the Servicer for the entire pool and will not advance any delinquent principal and interest (P&I) 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 43 securitizations under the Ajax Mortgage Loan Trust shelf prior to AJAX 2022-A. These issuances were backed by seasoned loans, RPLs, or NPLs 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 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 rated Notes in full at a price equal to the remaining note amount of the rated Notes plus accrued and unpaid interest, and any unpaid expenses and reimbursement amounts (Rated Note Redemption Price). Such Rated Note Redemption Rights may be exercised on any date:
-- Beginning the Payment Date after the Redemption Account equals or exceeds the Rated Note Redemption Price,
-- Beginning three years after the Closing Date at the direction of the Depositor, or
-- Beginning five years after the Closing Date at the direction of either the Depositor or the Majority Controlling Holders.

The Redemption Date is any date when a Funded Redemption or an Optional Redemption occurs.

The transaction employs a sequential-pay cash flow structure with a bullet feature to Class A-2 and more subordinate notes on the Redemption Date. P&I collections are commingled and are first used to pay interest to the Notes sequentially and then to pay Class A-1 until reduced to zero, which may provide for timely payment of interest to certain rated Notes. Class A-2 and below are not entitled to any payments of principal until the Redemption Date or upon the occurrence of an Event of Default. Prior to the Redemption Date or an Event of Default, any available funds remaining after Class A-1 is paid in full will be deposited into a Redemption Account.

Beginning on the Payment Date in April 2029 (Step-Up Date), the Class A-1 Notes will be entitled to its initial Note Rate plus the Step-Up Note Rate of 1.00% per annum. If the Issuer does not redeem the rated Notes in full by the Step-Up Date, an Accrual Event will be in effect until the earlier of the Redemption Date or the occurrence of an Event of Default.

If an Accrual Event is in effect and Class A-1 is outstanding, Class A-2 and more subordinate notes will become accrual Notes, and interest that would otherwise be allocated to such classes will be paid as principal to the Class A-1 Notes until reduced to zero. Any excess accrual amounts on such Payment Date will be deposited into the Redemption Account. All such accrual amounts will be added to the principal balance of the related outstanding accrual Notes. If an Accrual Event is in effect and Class A-1 is no longer outstanding, Class A-2 will be entitled to interest from available funds, or from the Redemption Account, as applicable. Class A-2 and more subordinate notes will only receive principal on the Redemption Date or upon the occurrence of an Event of Default.

If a Redemption Date or an Event of Default has not occurred prior to the Stated Final Maturity Date, amounts in the Redemption Account will be paid, sequentially, as interest and then as principal to the Notes until reduced to zero (IPIP) on the Stated Final Maturity Date.

In addition to the above bullet and accrual features, a certain aspect of the interest rates on the Notes is less commonly seen in DBRS Morningstar-rated seasoned securitizations as well. The interest rates on the Notes are set at fixed rates, which are not capped by the net weighted-average coupon or available funds. This feature causes the structure to need elevated subordination levels relative to a comparable structure with fixed-capped interest rates because more principal must be used to cover interest shortfalls. DBRS Morningstar considered such nuanced features and incorporated them in its cash flow analysis. The cash flow structure is discussed in more detail in the Cash Flow Structure and Features section of the related report.

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 incorporates only cumulative losses, dissimilar to other rated RPL securitizations;
-- The absence of a repurchase remedy by the Seller, dissimilar to other rated RPL securitizations, but similar to AJAX 2021-E; and
-- A Breach Reserve Account, which will be available to satisfy losses related to R&W breaches. Such account is fully funded upfront and then funds after interest is paid to the Notes, dissimilar to other rated RPL securitizations.

Although certain features (cumulative loss–only pool trigger, absence of the Seller repurchase remedy, and the Breach Reserve Account shortfall amounts funding after interest) 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 Breach Reserve Account is fully funded upfront, which is more favorable than other rated RPL securitizations. Details are further described in the Representations and Warranties section of the related report.

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 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 (LTV) ratios, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes, delinquencies have been gradually trending downwards, 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 March 2022 Update,” dated March 24, 2022.

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

The transaction also includes the following challenges:
-- Severely delinquent loans.
-- R&W 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 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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