DBRS Morningstar Finalizes Provisional Ratings on ACHM Trust 2023-HE1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2023-HE1 (the Notes) issued by ACHM Trust 2023-HE1:

-- $105.1 million Class A at AAA (sf)
-- $11.8 million Class B at BBB (low) (sf)
-- $14.4 million Class C at B (low) (sf)

The AAA (sf) rating on the Class A Notes reflects 31.15% of credit enhancement provided by subordinate notes. The BBB (low) (sf) and B (low) (sf) ratings reflect 23.45% and 14.00% of credit enhancement, respectively.

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

This transaction is a securitization of first- and junior-lien revolving home equity lines of credit (HELOCs) recently originated mainly for debt consolidation and funded by the issuance of the Notes. The Notes are backed by 2,556 HELOCs with a total unpaid principal balance (UPB) of $152,662,297 and a total current credit limit of $156,271,573 as of the Cut-Off Date (December 31, 2022). The portfolio, on average, is five months seasoned, though seasoning ranges from two to 32 months. Approximately 98.3% of the HELOCs have been performing since origination.

Lendage, LLC, doing business as Achieve Home Loans (AHL), a real estate finance company, is the Originator of all HELOCs in the pool. Launched in 2019, AHL is a residential mortgage lender that specializes in originating HELOCs to consumer borrowers. Lendage, LLC became known as Achieve Home Loans in December 2022 in connection with the rebranding by Freedom Financial Network Funding, LLC (Freedom Financial), the parent of AHL, to the Achieve brand. As of December 31, 2022, its HELOC portfolio consisted of approximately 6,900 HELOCs with an original loan balance of approximately $380 million.

AHL is a subsidiary of Freedom Financial and Lendage Holding, LLC, both of which are subsidiaries of Pantheon Freedom, Inc., AHL’s ultimate parent company. Within Freedom Financial, AHL is an affiliate of Freedom Financial Network, LLC (FFN). FFN was founded in 2002 in Silicon Valley to provide debt settlement services to consumers. Operating entities within FFN include Freedom Debt Relief; Freedom Financial Asset Management, LLC; bills.com; and AHL. These subsidiaries combined have settled more than $15.6 billion on behalf of consumers and have more than $7.0 billion of consumer debt under management as of June 30, 2022.

The transaction’s Sponsor is Series B, a series of Freedom Consumer Credit Fund, LLC (the Sponsor or the Fund), an affiliate of Freedom Financial Asset Management, LLC (FFAM). FFAM is an operating entity of FFN and a general partner in the Fund, acting as an advisor to the Fund. The Fund was set up to acquire the consumer loans from FFN and AHL, sponsor securitizations, and manage a portfolio of loans and securities, including the securities retained after the securitization issuance.

The transaction is the second securitization of HELOCs by the Sponsor. Previously, the Fund sponsored 14 DBRS Morningstar-rated securitizations of the fixed-rate unsecured fully amortizing consumer installment loans originated by various originators under FFN debt consolidation programs. All of these asset-backed security transactions were issued under the FREED shelf.

The transaction includes mostly junior-liens (all second-liens) and some first-lien HELOCs.

AHL offers two HELOC products: the Achieve Debt Consolidation (Limited Cash-Out) HELOCs and the Achieve Expanded Use HELOCs. The Debt Consolidation HELOCs are designed for borrowers with available equity in their homes, but have secured or unsecured debts that generate significant interest expenses and/or limit the borrowers’ cash flow. A minimum monthly payment savings of $200 is required under the Achieve Debt Consolidation program. The Achieve Expanded Use HELOCs (Cash-Out) are intended for borrowers with higher credit scores looking to improve their homes or plan for additional expenses and allows for less than $200 in payment savings. In this transaction, most of the HELOCs were originated under the Achieve Debt Consolidation program (91.6% of the pool) and the remaining loans under Achieve Expanded Use Program (8.4% of the pool). AHL uses income, employment, and asset verification (in certain circumstances) methods to qualify borrowers for income.

In this transaction, all loans are open-HELOCs that have a draw period of five years during which borrowers may make draws up to a credit limit, though such right to make draws may be temporarily frozen in certain circumstances. At the end of the draw term, the HELOC mortgagors have a repayment period of generally five or 10 years. During the repayment period, borrowers are no longer allowed to draw, and their monthly principal payments will equal an amount that allows the outstanding loan balance to evenly amortize down. The HELOCs in this transaction have no interest-only payment period, so borrowers are required to make both interest and principal payments during the draw and repayment periods. No loans require a balloon payment.

Relative to other types of HELOCs backing DBRS Morningstar-rated deals, the loans in the pool are all fully amortizing, have a shorter term, shorter draw period, and are made mainly for debt consolidation to lower borrowers’ monthly payments.

AHL is the Servicer of all loans in the pool. The initial annual servicing fee is 1.25% per annum. Specialized Loan Servicing LLC will subservice 100% of the loans. Wilmington Trust National Association (rated AA (low) with a Stable trend by DBRS Morningstar) will serve as Indenture Trustee, Custodian, Paying Agent, Note Registrar, Certificate Registrar, and REMIC Administrator. Wilmington Savings Fund Society, FSB will serve as the Owner Trustee.

The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest consisting of the required percentage of the Class A, B, C, and CE Note amounts and Class FR Certificate to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. The Sponsor or a majority-owned affiliate of the Sponsor will be required to hold the required credit risk until the later of (1) the fifth anniversary of the Closing Date and (2) the date on which the aggregate loan balance has been reduced to 25% of the loan balance as of the Cut-Off Date, but in any event no longer than the seventh anniversary of the Closing Date.

Similar to other transactions backed by junior-lien mortgage loans or HELOCs, in this transaction, any HELOCs, including first and junior liens, that are 180 days delinquent under the Mortgage Bankers Association (MBA) delinquency method will be charged-off.

This transaction uses a structural mechanism similar to other HELOC transactions to fund future draw requests. The Servicer will be required to fund draws and will be entitled to reimburse itself for such draws from the principal collections prior to any payments on the Notes and the Class FR Certificates.

If the aggregate draws exceed the principal collections (Net Draw), then the Servicer is entitled to reimburse itself for draws funded from amounts on deposit in the Reserve Account (including amounts deposited into the Reserve Account on behalf of the Class FR Certificates holder after the Closing Date).

The Reserve Account has an ongoing target amount according to a schedule. The Reserve Account is partially funded at closing and has an initial balance equal to the target amount of $2,289,934 (or about 1.50% of the collateral balance as of the Cut-Off Date). The target amount will gradually build to $3,282,239 or 2.15% of the collateral balance as of the Cut-Off Date in March 2025 (26th payment period after the closing date) according to a schedule that prescribes the required reserve amount for each payment period and is provided in the transaction documents. If the Reserve Account is not at target, the Paying Agent will use the available funds remaining after paying transaction parties' fees and expenses, reimbursing the Servicer for any unpaid fees or Net Draws, and paying the accrued and unpaid interest on the bonds to build it to the target. The top-up of the account occurs before making any principal payments to the Class FR Certificates holder or the Notes. To the extent the Reserve Account is not funded up to its required amount from the principal and interest collections, the Class FR Certificates holder will be required to use its own funds to reimburse the Servicer for any Net Draws.

Nevertheless, the servicer is still obligated to fund draws even if the principal collections and the Reserve Account are insufficient in a given month for full reimbursement. In such cases, the Servicer will be reimbursed on subsequent payment dates first, from amounts on deposit in the Reserve Account (subject to the deposited funds), and, second, from the principal collections in subsequent collection periods. Freedom Financial, as a holder of the Trust Certificate/Class FR Certificates, will have an ultimate responsibility to ensure draws are funded by remitting funds to the Reserve Account to reimburse the Servicer for the draws made on the loans, as long as all borrower conditions are met to warrant draw funding. The Class FR Certificates' balance will be increased by the amount of any Net Draws funded by the Class FR Certificates holder. The Reserve Account required amount will become $0 on the payment date in February 2028 (after the draw period ends for all HELOCs), at which point the funds will be released through the transaction waterfall.

In its analysis of the proposed transaction structure, DBRS Morningstar does not rely on the creditworthiness of either the Servicer or Freedom Financial. Rather, the analysis relies on the assets’ ability to generate sufficient cash flows, as well as the Reserve Account, to fund draws and make interest and principal payments.

DBRS Morningstar performs a traditional cash flow analysis to stress prepayments, loss timing, and interest rates. In HELOC transactions, because prepayments (and scheduled principal payments, if applicable) are primary sources from which to fund draws, DBRS Morningstar also tests a combination of high draw and low prepayment scenarios to stress the transaction.

Because most of the borrowers in this pool have drawn a significant amount of the available credit lines at closing, to test any high draw and low prepay combinations, DBRS Morningstar considers that the borrowers must first repay the credit line in order to draw any meaningful new funds again. Please see the Cash Flow Analysis section of the related report for more details of such scenarios.

The transaction employs a sequential-pay cash flow structure. The excess interest remaining from covering the realized losses is used to maintain overcollateralization (OC) at the target of 14.00% of outstanding UPB after the Closing Date. The excess interest can be released to the residual holder if the OC is built to the target so long as the Credit Event, based on the cumulative loss and/or delinquency thresholds, does not exist. Please see the Cash Flow Structure and Features section of the related report for more details.

For this transaction, other than the Servicer’s obligation to fund any monthly Net Draws, described above, neither the Servicer nor any other transaction party will fund any monthly advances of principal and interest on any HELOC. However, the Servicer is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances) to the extent such advances are deemed recoverable or as directed by the Controlling Holder (the holder of more than a 50% percentage interest of the Class CE Notes; initially, the Sponsor's affiliate). For the junior-lien HELOCs, the Servicer will make servicing advances only if such advances are deemed recoverable or if the associate first-lien mortgage has been paid off and such HELOC has become a senior-lien mortgage loan.

All of the loans in the pool are exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because HELOCs are not subject to the ATR/QM rules.

The Depositor may, at its option, on or after the earlier of (1) the payment date on which the balance of the Class A Notes is reduced to zero or (2) the date on which the total loans' and real estate owned (REO) properties' balance falls to or below 25% of the loan balance as of the Cut-Off Date (Optional Termination Date), purchase all of the loans and REO properties at the optional termination price described in the transaction documents.

The Depositor, at its option, may purchase any mortgage loan that is 90 days or more MBA delinquent under the MBA method (or in the case of any loan that has been subject to a Coronavirus Disease (COVID-19)-related forbearance plan, on any date from and after the date on which such loan becomes 90 days MBA delinquent following the end of the forbearance period) at the repurchase price (Optional Purchase) described in the transaction documents. The total balance of such loans purchased by the Depositor will not exceed 10% of the Cut-Off balance.

The Servicer, at a direction of the Controlling Holder, may direct the Issuer to sell eligible nonperforming loans (those 120 days or more MBA delinquent) or REO properties (both Eligible Non-Performing Loans (NPLs)) to third parties individually or in bulk sales. The Controlling Holder will have a sole authority over the decision to sell the Eligible NPLs, as described in the transaction documents.

The ratings reflect transactional strengths that include the following:

-- Certain HELOC attributes,
-- Robust equity and near prime credit quality,
-- Current loan status, and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Holder of the Class FR Certificates may fail to reimburse servicer for draws,
-- Representations and warranties standard, and
-- No servicer advances of delinquent principal and interest.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020; https://www.dbrsmorningstar.com/research/359116).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (May 4, 2020),
https://www.dbrsmorningstar.com/research/360574/assessing-us-rmbs-pools-under-the-ability-to-repay-rules
-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
https://www.dbrsmorningstar.com/research/366613/third-party-due-diligence-criteria-for-us-rmbs-transactions
-- Representations and Warranties Criteria for U.S. RMBS Transactions (April 22, 2020),
https://www.dbrsmorningstar.com/research/359902/representations-and-warranties-criteria-for-us-rmbs-transactions
-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance
-- Operational Risk Assessment for U.S. RMBS Originators (November 23, 2022),
https://www.dbrsmorningstar.com/research/405664/operational-risk-assessment-for-us-rmbs-originators
-- Operational Risk Assessment for U.S. RMBS Servicers (November 23, 2022),
https://www.dbrsmorningstar.com/research/405665/operational-risk-assessment-for-us-rmbs-servicers

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.