Morningstar DBRS Finalizes Provisional Credit Ratings on Verus Securitization Trust 2024-1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the Mortgage-Backed Notes, Series 2024-1 (the Notes) issued by Verus Securitization Trust 2024-1 (VERUS 2024-1 or the Trust) as follows:

-- $433.2 million Class A-1 at AAA (sf)
-- $69.1 million Class A-2 at AA (high) (sf)
-- $87.7 million Class A-3 at A (high) (sf)
-- $47.7 million Class M-1 at BBB (sf)
-- $28.8 million Class B-1 at BB (high) (sf)
-- $17.5 million Class B-2 at B (sf)

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

The AAA (sf) credit rating on the Class A-1 certificates reflects 38.25% of credit enhancement provided by subordinate certificates. The AA (high) (sf), A (high) (sf), BBB (sf), BB (high) (sf), and B (sf) credit ratings reflect 28.40%, 15.90%, 9.10%, 5.00%, and 2.50% of credit enhancement, respectively.

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 Mortgage-Backed Notes, Series 2024-1 (the Notes). The Notes are backed by 1,360 mortgage loans with a total principal balance of $701,556,565 as of the Cut-Off Date (January 1, 2024).

Through various entities, Invictus Capital Partners, LP (Invictus) began acquiring loans in 2015, and Verus 2024-1 represents the 54th rated securitization issued from the Verus shelf.

The pool was originated by Hometown Equity Mortgage, LLC (15.8%) as well as various other originators (84.2%), each contributing less than 10.0% of the loans to the Trust.

Shellpoint Mortgage Servicing will act as the Servicer for all loans. The loans were acquired by the Mortgage Loan Sellers or their affiliates and underwritten to Sponsor approved underwriting standards, which correspond to certain programs.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay (ATR) rules, they 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, 32.5% of the loans are designated as non-QM, 13.6% are designated as QM Rebuttable Presumption, and 11.9% are designated as QM Safe Harbor. Approximately 42.0% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Approximately 29.7% of the loans were originated under a Property Focused Investor Loan Debt Service Coverage Ratio (DSCR) program and 0.2% were originated under a Property Focused Investor Loan program. Certain loans (9.2%) within the DSCR program had a DSCR less than 1.00 times (x).

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical interest, which represents at least 5% of the aggregate fair value of the Notes to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Additionally, as of the Closing Date, the Sponsor is expected to initially retain 100% of the Class B-3, A-IO-S, and XS Notes.

On or after the earlier of (1) the Payment Date occurring in January 2027 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Administrator, at the Optional Redemption Right Holder's option, may redeem all of the outstanding Notes at a price equal to the greater of (A) the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts and (B) the class balances of the related Notes less than 90 days delinquent with accrued unpaid interest plus fair market value of the loans 90 days or more delinquent and real estate-owned properties. After such purchase, the Depositor must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

The Advancing Party will fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent. The Advancing Party has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. The Servicer, however, is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.

This transaction incorporates 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 (Trigger Event). Prior to a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1, A-2, and A-3 before being applied sequentially to amortize the balances of the senior and subordinate Notes. After a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 sequentially (IIPP). For all other classes, principal proceeds can be used to cover interest shortfalls as the more senior Notes are paid in full.

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

The credit ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition;
-- Satisfactory third-party due-diligence review; and
-- Improved underwriting standards.

The transaction also includes the following challenges:

-- Certain nonprime, Non-QM, and investor loans;
-- Representations and warranties framework;
-- Three-month advances of delinquent P&I; and
-- P&I Advancing Party’s financial capability.

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

Morningstar DBRS 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 Distribution Amount, Interest Carryforward Amount, and the related Class Balances.

Morningstar DBRS' credit ratings do 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, Morningstar DBRS' credit ratings do not address the payment of any Cap Carryover Amounts based on its position in the cash flow waterfall.

Morningstar DBRS' credit ratings on the Class A-1, Class A-2, and Class A-3 Certificates also address the credit risk associated with the increased rate of interest applicable to the Class A-1, Class A-2, and Class A-3 Certificates if the Class A-1, Class A-2, and Class A-3 Certificates remain outstanding on the step-up date (February 2028) in accordance with the applicable transaction document(s).

Morningstar DBRS' 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 relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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://dbrs.morningstar.com/research/420108/rmbs-insight-1.3:-u.s.-residential-mortgage-backed-securities-model-and-rating-methodology

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info-DBRS@morningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
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://dbrs.morningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (April 28, 2023),
https://dbrs.morningstar.com/research/413297
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://dbrs.morningstar.com/research/415687
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023),
https://dbrs.morningstar.com/research/420333
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023),
https://dbrs.morningstar.com/research/414076
-- Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://dbrs.morningstar.com/research/425081
-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023),
https://dbrs.morningstar.com/research/420106
-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023),
https://dbrs.morningstar.com/research/420107

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.