DBRS Morningstar Assigns Provisional Ratings to Mill City Mortgage Loan Trust 2023-NQM1
RMBSDBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage-Backed Certificates, Series 2023-NQM1 (the Certificates) to be issued by Mill City Mortgage Loan Trust 2023-NQM1 (the Issuer):
-- $245.0 million Class A-1 at AAA (sf)
-- $35.8 million Class A-2 at AA (sf)
-- $23.9 million Class A-3 at A (high) (sf)
-- $19.2 million Class M-1 at BBB (high) (sf)
-- $13.4 million Class B-1 at BB (high) (sf)
-- $12.3 million Class B-2 at B (high) (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 36.05% of credit enhancement provided by subordinate notes. The AA (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (high) (sf) ratings reflect 26.70%, 20.45%, 15.45%, 11.95%, and 8.75% of credit enhancement, respectively.
This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 753 loans with a total principal balance of approximately $383,131,417, as of the Cut-Off Date (January 31, 2023). The collateral description and disclosure on the mortgage loans in the presale report reflect the approximate aggregate characteristics as of the Cut-Off Date unless otherwise specified.
This is the first non-Qualified Mortgage (non-QM) securitization by the Sponsor, an entity 100% owned by fund entities managed by AB CarVal Investors, L.P. (CarVal). In February 2022, funds managed by CarVal established a mortgage conduit, Mill City Loans (Mill City), to source residential mortgage assets on a flow and bulk basis. Since inception, CarVal has acquired more than 1,300 non-QM loans totaling $720 million through Mill City. Previously, the Sponsor has closed 15 rated securitizations of seasoned, performing, and reperforming residential mortgages.
The pool is, on average, eight months seasoned with loan ages ranging from four to 13 months. The top originators for the mortgage pool are HomeXpress Mortgage Corp (41.4%) and Castle Mortgage Corporation doing business as (dba) Excelerate Capital (36.9%). The remaining originators each represent 10.0% or less of the mortgage loans. The Servicer of the loans is NewRez LLC dba Shellpoint Mortgage Servicing. DBRS Morningstar conducted a review of CarVal's, the aggregator, residential mortgage platform and believes the company is an acceptable mortgage loan aggregator.
Mill City Holdings, LLC will act as the Sponsor and Servicing Administrator. U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar), will act as the Paying Agent and the Certificate Registrar. Wilmington Savings Fund Society, FSB will act as the Trustee. Computershare Trust Company, N.A. (rated BBB with a Stable trend by DBRS Morningstar) will act as the Custodian.
CVI CVF V Pooling Fund II LP, a fund managed by CarVal, will be the Representations and Warranties (R&W) provider. As of December 31, 2022, the R&W provider had a net asset value of approximately $1.78 billion. The obligations of the R&W provider will expire on the later of (1) the Distribution Date in February 2028 and (2) the date on which the R&W provider initiates liquidation of the fund (R&W Sunset Date).
Except for 22 loans (4.7% of the pool) that were 30 to 119 days delinquent, according to the Mortgage Bankers Association (MBA) delinquency calculation method, as of the Cut-Off Date, the loans have been performing since origination.
In accordance with the Consumer Financial Protection Bureau (CFPB) QM rules, 51.5% of the loans by balance are designated as non-QM and 0.7% as QM Rebuttable Presumption. Approximately 47.8% of the loans in the pool made to investors for business purposes are exempt from the CFPB Ability-to-Repay (ATR) and QM rules. No loan has a loan application date before January 10, 2014, so each loan is subject to the QM/ATR rules issued by the CFPB as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
For this transaction, the Servicer will fund advances of delinquent principal and interest (P&I) until loans become 90 days delinquent, contingent upon a recoverability determination. Additionally, the Servicer is obligated to make advances in respect of taxes and insurance; the cost of preservation, restoration, and protection of mortgaged properties; and any enforcement or judicial proceedings, including foreclosures and reasonable costs and expenses incurred in the course of servicing and disposing of properties.
The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible horizontal residual interest in the Issuer in the amount of not less than 5.0% of the aggregate fair value of the Certificates (other than the Class R Certificates) to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.
The Sponsor, at its option, may purchase any mortgage loan that is 90 days or more delinquent under the MBA method (or in the case of any loan that has been subject to a Coronavirus Disease (COVID-19) pandemic-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 Date balance.
The Servicer, at its option, on or after the date on which the balance of the mortgage loans falls below 10% of the loan balance as of the Cut-Off Date, may purchase all of the mortgage loans and real estate owned properties at the optional termination price described in the transaction documents.
The Depositor may, at its option, on or after the later of (1) the two-year anniversary of the Closing Date, and (2) the earlier of (A) the three-year anniversary of the Closing Date or (B) the date on which the balance of mortgage loans falls to or below 30% of the loan balance as of the Cut-Off Date (Optional Redemption), purchase all of the outstanding Certificates at the price described in the transaction documents.
The transaction's cash flow structure is similar to that of other non-QM securitizations. The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Credit Event). Principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 Certificates (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated certificates. For the Class A-3 Certificates (only after a Credit Event) and for the mezzanine and subordinate classes of certificates (both before and after a Credit Event), principal proceeds will be available to cover interest shortfalls only after the more senior certificates have been paid off in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to Class A-3.
Of note, the Class A-1, A-2, and A-3 Certificates coupon rates step up by 100 basis points on and after the payment date in March 2027. Also, the interest and principal otherwise payable to the Class B-3 Certificates as accrued and unpaid interest may be used to pay the Class A-1, A-2, and A-3 Certificates Cap Carryover Amounts before and after the Class A coupons step up.
On January 15, 2023, Federal Emergency Management Agency (FEMA) announced that federal disaster assistance was made available to the state of California related to several winter storms, flooding, landslides, and mudslides that began on December 27, 2022. At this time, the sponsor has informed DBRS Morningstar that it was not aware of Mortgage Loans secured by Mortgaged Properties that are located in a FEMA disaster area that have suffered any disaster-related damage. The transaction documents include R&W regarding the property conditions, which state that the properties have not been damaged by any casualty. In a sensitivity analysis, DBRS Morningstar ran an additional scenario applying reduction of property values in certain areas of California that may have been impacted.
The ratings reflect transactional strengths that include the following:
-- Robust loan attributes and pool composition,
-- Compliance with the ATR Rules,
-- Improved underwriting standards,
-- Current loan status, and
-- Certain aspects of third-party due-diligence reviews.
The transaction also includes the following challenges:
-- Debt Service Coverage Ratio (DSCR) Loans,
-- Certain Non-Prime, Non-QM, and Investor Loans,
-- Three-Month Servicer Advances of Delinquent P&I, and
-- Representations and Warranties (R&W) Standard.
The full description of the strengths, challenges, and mitigating factors is detailed in the related Presale Report.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) 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.
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.
DBRS, Inc.
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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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
https://www.dbrsmorningstar.com/research/366613
-- Representations and Warranties Criteria for U.S. RMBS Transactions (April 22, 2020),
https://www.dbrsmorningstar.com/research/359902
-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008
-- Operational Risk Assessment for U.S. RMBS Originators (November 23, 2022),
https://www.dbrsmorningstar.com/research/405664
-- Operational Risk Assessment for U.S. RMBS Servicers (November 23, 2022),
https://www.dbrsmorningstar.com/research/405665
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com
ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.