DBRS Morningstar Assigns Provisional Ratings to Unlock HEA Trust 2023-1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Asset-Backed Notes, Series 2023-1 (the Notes) to be issued by Unlock HEA Trust 2023-1:

-- $152.5 million Class A at BBB (low) (sf)
-- $31.0 million Class B at BB (low) (sf)

The BBB (low) (sf) rating reflects credit enhancement of 25.69% for Class A, and the BB (low) (sf) rating reflects credit enhancement of 10.59% for Class B.

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

Home equity investments (HEIs) allow homeowners access to the equity in their homes without having to sell their homes or make monthly mortgage payments. HEIs provide homeowners with an alternative to borrowing and are available to homeowners of any age (unlike reverse mortgage loans, for example, for which there is often a minimum age requirement). A homeowner receives an upfront cash payment (an Advance or an Investment Amount) in exchange for giving an Investor (i.e., an Originator) a stake in their property. The homeowner retains sole right of occupancy of the property and pays all upkeep and expenses during the term of the HEI, but the Originator participates in any increase, or decrease, in the value of the property.

Like reverse mortgage loans, the HEI underwriting approach is asset-based, meaning there is greater emphasis placed on the value of the underlying property than on the credit quality of the homeowner. The property value is the main focus for predicting repayment because it is the primary source of funds to satisfy the obligation. HEIs are nonrecourse; a homeowner is not required to provide additional funds when the HEI repayment amount exceeds the remaining equity value in the property (after accounting for any other obligations such as senior liens, if applicable). Therefore, repayment of the Advance and any Originator return is primarily subject to the amount of appreciation/depreciation on the property.

As of the cut-off date, 221 contracts in the transaction are first lien contracts, representing roughly $28.31 million in current exercise value; 1,525 are second lien contracts, representing roughly $153.83 million in current exercise value; and 238 are third lien contracts, representing roughly $23.09 million in current exercise value.

Of the pool, 13.84% of the contracts are first lien and have a weighted-average exchange rate of 1.95x, 74.84% are second lien contracts and have a weighted-average exchange rate of 1.90x and the remaining 11.32% of the pool are third lien contracts with a weighted-average exchange rate of 1.98x. This brings the entire transaction's weighted-average exchange rate to 1.91x. To better understand the impact and mechanics of exchange rate please see the example below, in the Contract Mechanics—Worked Example section. The current unadjusted loan-to-value ratio (LTV) of the pool is 38.14% (i.e., of senior liens ahead of the contracts). At cutoff the pool had a weighted-average Contract-to-Value (CTV , also known as Option-to-Value, or OTV) of 19.04%, and a weighted-average Loan-plus-Contract-to-Value (LCTV also known as Loan-plus-Option-to-Value, or LOTV) of 57.34%.

The transaction uses a sequential structure in which cash distributions are first made to reduce the interest payment amount and any interest carryforward amount on the Class A-IO, Class A, and Class B (as long as trigger B event is not in effect). Payments are then made to reduce the note principal balance on Class A Notes until such notes are paid off. With respect to Class B Notes, payments are first made to any remaining interest payment amount and interest carryforward amount and then to reduce the note principal balance until such notes are paid off. Class C Notes are then paid the Interest Payment Amount and any previously accrued and unpaid Interest Payment Amount and then to reduce the note principal balance until such notes are paid off.

The Issuer may, at its option, exercise a call and purchase all of the outstanding Notes on the Optional Redemption Date. A failure to purchase all outstanding Notes on the Optional Redemption Date will cause a Class B Trigger Event and such trigger cannot be cured. During a Class B Trigger Event, the Class B Notes shall not receive any interest or principal payments until the Class A Notes are fully paid down.

DBRS Morningstar’s credit ratings on the Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated Notes are the related Class Principal Balance, Interest Payment Amount, and Interest Carryforward Amount.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

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/416784 (July 4, 2023).

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

The principal methodology applicable to the ratings is Rating and Monitoring U.S. Reverse Mortgage Securitizations (Appendix 3: Home Equity Investments Methodology) (July 17, 2023; https://www.dbrsmorningstar.com/research/417277).

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/384482.

The credit rating was initiated at the request of the rated entity.

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

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.

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://www.dbrsmorningstar.com/research/415687

-- Legal Criteria for U.S. Structured Finance (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023), https://www.dbrsmorningstar.com/research/420106

-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023), https://www.dbrsmorningstar.com/research/420107

-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023) https://www.dbrsmorningstar.com/research/420333

-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023), https://www.dbrsmorningstar.com/research/414076

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