DBRS Morningstar Assigns Provisional Ratings to A&D Mortgage Trust 2023-NQM2

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage Pass-Through Certificates, Series 2023-NQM2 (the Certificates) to be issued by A&D Mortgage Trust 2023-NQM2 (the Trust):

-- $240.5 million Class A-1 at AAA (sf)
-- $44.5 million Class A-2 at AA (low) (sf)
-- $30.7 million Class A-3 at A (low) (sf)
-- $17.1 million Class M-1 at BBB (low) (sf)
-- $21.0 million Class B-1 at BB (low) (sf)
-- $14.2 million Class B-2 at B (low) (sf)

The AAA (sf) rating on the Class A-1 Certificates reflects 36.55% of credit enhancement provided by subordinated Certificates. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) ratings reflect 24.80%, 16.70%, 12.20%, 6.65%, and 2.90% 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 a portfolio of fixed-rate and adjustable-rate prime and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 985 loans with a total principal balance of approximately $379,030,482 as of the Cut-Off Date (April 1, 2023).

The originators for the mortgage pool are A&D Mortgage LLC (ADM; 91.5%) and others (8.5%). ADM originated the mortgages under the following five programs:
-- Super Prime
-- Prime
-- Debt Service Coverage Ratio (DSCR)
-- Foreign National – Full Doc
-- Foreign National – DSCR

A&D Mortgage LLC (ADM) will act as the Sponsor and the Servicer for all loans.

Nationstar Mortgage LLC (Nationstar) will act as the Master Servicer and Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) will act as the Securities Administrator and Certificate Registrar. Wilmington Trust, National Association (rated AA (low) with a Stable trend by DBRS Morningstar) will serve as the Custodian, and Wilmington Savings Fund Society, FSB will act as the Trustee.

The pool is about three months seasoned on a weighted-average basis, although seasoning may span from zero to 106 months.

In accordance with U.S. credit risk retention requirements, ADM as the Sponsor, either directly or through a Majority-Owned Affiliate, will retain an eligible horizontal residual interest consisting of the Class X Certificates and a portion of the Class B-3 Certificates (together, the Risk Retained Certificates), representing not less than 5% economic interest in the transaction, to satisfy the requirements under Section 15G of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.

Although the applicable mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ability-to-repay (ATR) rules, they were made to borrowers who generally do not qualify for the agency, government, or private-label nonagency prime products for various reasons described above. In accordance with the CFPB Qualified Mortgage (QM)/ATR rules, 46.9% of the loans are designated as non-QM. Approximately 53.0% of the loans are made to investors for business purposes and are thus not subject to the QM/ATR rules. Also, two loans (0.1% of the pool) are a qualified mortgage with a conclusive presumption of compliance with the ATR rules and is designated as QM Safe Harbor.

The Servicer will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent under the Mortgage Bankers Association (MBA) method, contingent upon recoverability determination. The Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties. If the Servicer fails in its obligation to make P&I advances, Nationstar, as the Master Servicer, will be obligated to fund such advances. In addition, if the Master Servicer fails in its obligation to make P&I advances, Citibank, N.A., as the Securities Administrator, will be obligated to fund such advances. The Master Servicer and Securities Administrator are only responsible for P&I Advances; the Servicer is responsible for P&I and advances with respect to taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (Servicing Advances). If the Servicer fails to make the Servicing Advances on a delinquent loan, the recovery amount upon liquidation may be reduced.

The Sponsor (ADM) will have the option, but not the obligation, to repurchase any mortgage loan that is 90 or more days delinquent under the MBA method (or, in the case of any Coronavirus Disease (COVID-19) forbearance loan, such mortgage loan becomes 90 or more days delinquent under the MBA method after the related forbearance period ends) at the Repurchase Price, provided that such repurchases in aggregate do not exceed 7.5% of the total principal balance as of the Cut-Off Date.

The Depositor (A&D Mortgage Depositor LLC) may, at its option, on any date that is 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 and (B) the date on which the total loan balance is less than or equal to 30% of the loan balance as of the Cut-Off Date, purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts (Optional Redemption). An Optional Redemption will be followed by a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds to the appropriate holders of regular or residual interests.

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, Class A-2, Class A-3 and Class M-1 Certificates.

Of note, the Class A-1, Class A-2, and Class A-3 Certificates' coupon rates step up by 100 basis points on and after the payment date in May 2027 (Step-Up Certificates). 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, Class A-2, Class A-3, and Class M-1 Certificates' Cap Carryover Amounts after the Class A coupons step up.

The ratings reflect transactional strengths that include the following:
-- Substantial borrower equity, robust loan attributes, and pool composition;
-- Compliance with the ATR rules;
-- Satisfactory third-party due-diligence review;
-- Current loans; and
-- Improved underwriting standards.

The transaction also includes the following challenges:
-- Nonprime, non-QM, and investor loans;
-- Three-month advances of delinquent P&I;
-- Representations and warranties framework;
-- Servicer’s financial capability; and
-- A servicer with limited performance history.

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 (May 17, 2022).

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

The principal methodology applicable to the rating is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (March 3, 2023; https://www.dbrsmorningstar.com/research/410473).

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
140 Broadway, 43rd Floor
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
-- 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.