DBRS Rates PennyMac Loan Trust 2010-NPL1, Mortgage-Backed Notes, Series 2010-NPL1

DBRS has today assigned the following ratings to the Mortgage-Backed Notes, Series 2010-NPL1 issued by PennyMac Loan Trust 2010-NPL1 (the Trust).

-- $55.9 million Class A rated at ‘A’ (low) (sf)
-- $18.6 million Class M-1 rated at BBB (sf)

The ‘A’ (low) (sf) rating on the Class A Notes reflect 85.0% of credit enhancement provided by subordinate classes and overcollateralization. The BBB (sf) on the Class M-1 notes reflect 80.0% of credit enhancement. Additionally a reserve fund has been established for the benefit of the holders of the Class A and M-1 notes to cover twelve months of current interest, servicing and trustee fees. The ratings on the notes also reflect the quality of the underlying assets and the capabilities of PennyMac Loan Services, LLC (PennyMac) as servicer. Deutsche Bank National Trust Company will serve as trustee and custodian. Other than the specified notes above, DBRS does not rate any other notes in this transaction.

Available funds that include interest and principal payments collected from the mortgage loans as well as liquidation proceeds from the sale of mortgaged properties will generally be distributed on the 25th of each month commencing in September 2010. Interest payments including any cap carryover amounts will be paid to the notes in their order of seniority. Principal will also be paid sequentially by seniority. The Class M-2 notes are accrual notes and their interest payment amounts, to the extent there are available funds, will be paid as principal to the Class A and M-1 sequentially by seniority.

The Trust contains 38-month seasoned mostly first-lien, fixed and adjustable rate mortgages secured by one- to four-family residential properties. As of the cut-off date (July 31, 2010), the loans had an aggregate principal balance of approximately $372.8 million, a weighted-average (W.A.) mortgage rate of 6.4% and an average updated FICO score of 576. DBRS calculated an approximate W.A current loan-to-value (LTV) ratio of 145% using updated broker price opinions (BPO) values. The BPOs were no more than 6 months seasoned as of the cut-off date, and DBRS assumed further market value declines when the borrowers default.

As of the cut-off date, approximately 24.6% of the loans were current as per the MBA, but many of these loans have derogatory pay histories or were modified in the past. The remaining 75.4% of the loans were non-performing though a portion of the non-performing loans (approximately 11.4% of the pool) have made at least one of the prior three monthly payments. Additionally, 52% of the pool had been previously modified. In its analysis, DBRS reviewed all modified loans in conjunction with modification dates and pay histories. To the extent that a modified loan has not demonstrated a consistently improved payment pattern for a minimum of one year, DBRS reverted its status back to delinquent when assessing the default frequencies. For example, a loan that was modified five months ago and was 60 days delinquent before modification will be treated as 60 days delinquent in determining default frequencies. In addition, depending on the severity of the pay histories, DBRS would apply the same methodology to non-modified loans with a derogatory pay history (that was subsequently cured) on a case-by-case basis.

In this transaction, PennyMac will not advance any principal and interest payments on delinquent mortgages to the securitization trust. This will likely result in lower loss severities to the bond holders because the advanced interest will not have to be reimbursed from the trust upon the liquidation of the mortgages. In its cash flow analysis, DBRS assumed that payments to the note holders will primarily be received from liquidation proceeds of mortgage properties. The expected timing of liquidation proceeds were stressed by DBRS after reviewing historical market trends and servicer experience. For loans that are contractually current, DBRS ran a scenario with a front-loaded delinquency curve. In this scenario, any scheduled principal and interest collections are shut off as soon as loans become delinquent.

Clayton performed a compliance diligence on 450 loans which was approximately 30% of the anticipated mortgage pool by balance. PNMAC Mortgage Opportunity Fund, LP (the Seller) at the time of purchasing the loans that are included in this pool, engaged two other diligence providers to perform compliance diligence on approximately 1,245 loans. Clayton performed pay history reviews for 193 of the loans. Property valuations were obtained on 100% of the loans in the form of BPOs. Additionally, ClearCapital.com, Inc conducted value reconciliations on 440 of the initial BPOs. For more details on the diligence, please refer to the offering documents.

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

The applicable methodology is Rating U.S. Residential Mortgage-Backed Securities Transactions, which can be found on our website under Methodologies.