DBRS Morningstar Assigns Provisional Ratings to HOMES 2023-NQM2 Trust

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

-- $220.0 million Class A-1 at AAA (sf)
-- $30.7 million Class A-2 at AA (sf)
-- $22.9 million Class A-3 at A(sf)
-- $18.2 million Class M-1 at BBB (low) (sf)
-- $9.9 million Class B-1 at BB (high) (sf)
-- $8.6 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 certificates reflects 33.35% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (low) (sf), BB (high) (sf), and B (high) (sf) ratings reflect 24.05%, 17.10%, 11.60%, 8.60%, and 6.00% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed-rate prime and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 764 loans with a total principal balance of approximately $330,084,520 as of the Cut-Off Date (April 30, 2023).

Approximately 78.8% of loans in the pool by balance were originated by HomeXpress Mortgage Corp. (HomeX or HomeXpress), and about 21.2% were sourced by other originators, each individually accounting for less than 10.0% of loans in the pool.

HOMES 2023-NQM2 represents the second rated securitization of the prime and nonprime first-lien residential mortgage loans issued by the Sponsor, APF Holdings I, L.P., from the HOMES shelf. The Sponsor is a special-purpose entity owned by funds managed or affiliated with Ares Alternative Credit Management LLC (Ares). The loans were purchased by a fund managed by Ares from the HomeX and Angel Oak (together, the Loan Sellers), and will be assigned to the Sponsor, another Ares-managed fund entity, on the Closing Date.

Specialized Loan Servicing LLC and Select Portfolio Servicing, Inc. will act as the Servicers for 36.7% and 63.3% of loans.

Wilmington Savings Fund Society, FSB will act as the Securities Administrator, Trustee and Certificate Registrar. Computershare Trust Company, N.A. (rated BBB with a Stable trend by DBRS Morningstar) will serve as the Custodian.

The pool is about eight months seasoned on a weighted-average (WA) basis, although seasoning may span from four to twelve months.

In accordance with U.S. credit risk retention requirements, the Sponsor, either directly or through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of the Class X Certificates and the required 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 the 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, 58.9% of the loans are designated as non-QM. Approximately 41.1% of the loans are made to investors for business purposes and are thus not subject to the QM/ATR rules.

Neither Servicer nor any other transaction party will have any obligation to make any advances of any delinquent scheduled monthly principal and interest (P&I) payments due on any of the loans. However, each 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). If any Servicer fails to make the Servicing Advances on a delinquent loan, the recovery amount upon liquidation may be reduced.

The Depositor (APF Securitization O4B-23B LLC) may, at its option, on any date on or after the date that is the earlier of (1) the distribution date occurring in May 2026, and (2) 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 any amounts deferred by the Servicers in connection with loan modifications after the Cut-off Date (Optional Redemption) and any outstanding pre-closing deferred amounts. 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), and Class A-3 Certificates 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 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, and Class A-3 Certificates (Senior 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 distribution date in June 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, and Class A-3 Certificates' Cap Carryover Amounts (both, before and after the Class A coupons step up).

The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary: “Baseline Macroeconomic Scenarios for Rated Sovereigns: April 2023 Update,” dated April 28, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

The ratings reflect transactional strengths that include the following:

-- Substantial borrower equity, robust loan attributes, and pool composition,
-- Compliance with 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,
-- No servicer advances of delinquent P&I, and
-- Representations and warranties framework.

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 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 ratings 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.

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/413218.

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 (April 28, 2023),
https://www.dbrsmorningstar.com/research/413297/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 (May 16, 2023),
https://www.dbrsmorningstar.com/research/414076/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.