DBRS Morningstar Finalizes Provisional Ratings on PRPM 2023-NQM2 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Certificates, Series 2023-NQM2 (the Certificates) issued by PRPM 2023-NQM2 Trust (the Issuer):

-- $178.7 million Class A-1 at AAA (sf)
-- $28.4 million Class A-2 at AA (sf)
-- $21.2 million Class A-3 at A (sf)
-- $13.8 million Class M-1 at BBB (sf)
-- $8.7 million Class B-1 at BB (sf)
-- $8.6 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 35.45% of credit enhancement provided by subordinated notes. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 25.20%, 17.55%, 12.55%, 9.40%, and 6.30% 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- and adjustable-rate expanded prime and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 615 mortgage loans with a total principal balance of $276,774,030 as of the Cut-Off Date (August 31, 2023).

PRPM 2023-NQM2 represents the third securitization issued from the PRPM NQM shelf, which is backed by both non-qualified mortgages (non-QM) and business purpose investment property loans underwritten using debt service coverage ratios (DSCR). PRP-LB V AIV, LLC, a fund owned by the aggregator, Balbec Capital LP & PRP Advisors, LLC (PRP), serves as the Sponsor of this transaction.

Nexera Holding LLC d/b/a Newfi Lending (30.0%) and NMSI, Inc. (27.2%) are the top two originators for the mortgage pool. The remaining originators each comprise less than 15.0% of the mortgage loans. Fay Servicing, LLC (100.0%) is the Servicer of the loans in this transaction. PRP acts as the Servicing Administrator. U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will act as the Trustee and Securities Administrator. U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will act as the Custodian.

For 41.8% of the pool, the mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and the DSCR, where applicable. In addition, 5.3% of the pool comprises investment property loans underwritten using debt-to-income ratios. Because these loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay (ATR) rules and the TILA/RESPA Integrated Disclosure rule.

For 51.9% of the pool, the mortgage loans were originated to satisfy the CFPB’s ATR rules, but were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the QM/ATR rules, these loans are designated as non-QM. The remaining loans subject to the ATR rules are designated as QM Safe Harbor (0.7%) and QM Rebuttable Presumption (0.2%) by unpaid principal balance (UPB).

The Depositor, a majority-owned affiliate of the Sponsor, will retain the Class B-3 and XS Certificates, representing an eligible horizontal interest of at least 5% of the aggregate fair value of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.

On or after the earlier of (1) the distribution date in September 2026 or (2) the date when the aggregate UPB of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Depositor, at its option, may redeem all of the outstanding Certificates at a price equal to the class balances of the related Certificates plus accrued and unpaid interest, including any Cap Carryover Amounts, any post-closing deferred amounts, and other fees, expenses, indemnification and reimbursement amounts described in the transaction documents (Optional Redemption). An Optional Redemption will be followed by a qualified liquidation.

The Sponsor will have the option, but not the obligation, to repurchase any mortgage loan that becomes 60 or more days delinquent under the Mortgage Bankers Association method at the Repurchase Price (par plus interest), provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

For this transaction, the Servicer will not fund advances of delinquent principal and interest on any mortgage. 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).

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior classes (Class A-1, A-2, and A-3) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). After a Trigger Event, principal proceeds can be used to cover interest shortfalls on Class A-1 and then Class A-2 before being applied sequentially to amortize the balances of the certificates (IIPP). For all other classes, principal proceeds can be used to cover interest shortfalls after the more senior classes are paid in full (IPIP).

Excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover Amounts due to Class A-1, A-2, and A-3. For this transaction, the Class A-1, A-2, and A-3 fixed rates step up by 100 basis points on and after the payment date in October 2027. On or after October 2027, interest and principal otherwise payable to the Class B-3 may also be used to pay Cap Carryover Amounts.

The ratings reflect transactional strengths that include the following:

-- Robust pool composition;
-- Certain loan attributes;
-- Improved underwriting standards;
-- Satisfactory third-party due-diligence review; and
-- Compliance with the ATR rules.

The transaction also includes the following challenges:

-- Investor DSCR loans;
-- Nonprime, non-QM, and investor loans;
-- No servicer advances of delinquent principal and interest; and
-- Representations and warranties framework.

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

DBRS Morningstar’s credit ratings on the Certificates 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 Certificates are the related interest payment amount, any interest carryforward amount, and the related principal remittance amount.

DBRS Morningstar’s credit ratings on Classes A-1, A-2, and A-3 also address the credit risk associated with the increased rate of interest applicable to these Certificates if they remain outstanding on the step-up date (October 2027) in accordance with the applicable transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, in this transaction, DBRS Morningstar's ratings do not address the payment of any cap carryover amounts.

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 credit ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023; https://www.dbrsmorningstar.com/research/420108).

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 credit rating action.

This is a solicited credit rating.

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

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

The credit 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)

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

-- 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)

-- 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)

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