DBRS Assigns Provisional Ratings to Towd Point Mortgage Trust 2016-1

DBRS, Inc. (DBRS) has today assigned the following provisional ratings to the Asset Backed Securities, Series 2016-1 (the Notes) issued by Towd Point Mortgage Trust 2016-1 (the Trust):

-- $523.2 million Class A1 at AAA (sf)
-- $51.4 million Class A2 at AA (sf)
-- $523.2 million Class A1A at AAA (sf)
-- $523.2 million Class A1B at AAA (sf)
-- $523.2 million Class A1C at AAA (sf)
-- $523.2 million Class X1 at AAA (sf)
-- $523.2 million Class X2 at AAA (sf)
-- $523.2 million Class X3 at AAA (sf)
-- $574.5 million Class A3 at AA (sf)
-- $574.5 million Class A3A at AA (sf)
-- $574.5 million Class A3B at AA (sf)
-- $574.5 million Class A3C at AA (sf)
-- $574.5 million Class X4 at AA (sf)
-- $574.5 million Class X5 at AA (sf)
-- $574.5 million Class X6 at AA (sf)

Classes X1, X2, X3, X4, X5, X6, X7, X8 and X9 are interest-only notes. The class balances represent notional amounts.

Classes A1A, A1B, A1C, X1, X2, X3, A3, A3A, A3B, A3C, X4, X5, X6, A4, A4A, A4B, A4C, X7, X8, X9 and A5 are exchangeable notes. These classes can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) and AA (sf) ratings on the Notes reflect 32.30% and 25.65% of credit enhancement, respectively, provided by subordinated Notes in the pool.

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

This transaction is a securitization of a portfolio of seasoned performing and re-performing first- and second-lien residential mortgages. The Notes are backed by approximately 2,868 loans with a total principal balance of $772,750,326 as of the Cut-Off Date (February 29, 2016).

The portfolio contains 62.1% modified loans. Within the pool, 363 mortgages have non-interest-bearing deferred amounts, which equates to 1.0% of the total principal balance as of the Cut-Off Date. The modifications happened more than two years ago for 92.9% of the modified loans. The loans are approximately 108 months seasoned, and all are current as of the Cut-Off Date, including 0.5% bankruptcy performing loans. Approximately 77.3% of the mortgage loans have been zero times 30 days delinquent (0 x 30) for at least the past 24 months under both the Office of Thrift Supervision (OTS) and Mortgage Bankers Association (MBA) delinquency methods.

FirstKey Mortgage, LLC (FirstKey) will acquire the loans from 30 transferring trusts on or prior to the Closing Date. The transferring trusts acquired the mortgage loans between 2013 and 2015 and are beneficially owned by both the Responsible Party and other funds managed by affiliates of Cerberus Capital Management, L.P. (Cerberus). Upon acquiring the loans from the transferring trusts, FirstKey, through a wholly owned subsidiary, Towd Point Asset Funding, LLC (the Depositor), will contribute loans to the Trust. As the Sponsor, FirstKey, through a majority-owned affiliate, will acquire and retain a 5% eligible vertical interest in each class of securities to be issued (other than any residual certificates) to satisfy the credit risk retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. These loans were originated and previously serviced by various entities through purchases in the secondary market. As of the Cut-Off Date, all the loans are serviced by Select Portfolio Servicing, Inc. (SPS).

There will not be any advancing of delinquent principal or interest on any mortgages by the servicers; however, the servicers are obligated to make advances in respect of taxes and insurance, reasonable costs and expenses incurred in the course of servicing and disposing of properties.

FirstKey, as the Asset Manager, has the option to sell certain non-performing loans or real estate owned (REO) properties to unaffiliated third parties individually or in bulk sales. The asset sale price has to equal a minimum reserve amount in order to maximize liquidation proceeds of such loans or properties. The minimum reserve amount equals the product of 63.42% and the then-current principal amount of the mortgage loans or REO properties.

The transaction employs a sequential-pay cash flow structure. Principal proceeds can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M1 and more subordinate bonds will not be paid until the more senior classes are retired.

The ratings reflect transactional strengths that include underlying assets that have generally performed well through the crisis, a strong servicer and Asset Manager oversight. Additionally, a satisfactory third-party due diligence review was performed on the portfolio with respect to regulatory compliance, payment history and data capture, as well as title and tax review. Updated broker price opinions or exterior appraisals were provided for 100% of the pool; however, a reconciliation was not performed on the updated values.

The transaction employs a relatively weak representations and warranties framework that includes a 13-month sunset, an unrated representation provider (FirstKey) with a backstop by an unrated entity (Cerberus Global Residential Mortgage Opportunity Fund, L.P.), certain knowledge qualifiers and fewer mortgage loan representations relative to DBRS criteria for seasoned pools. Mitigating factors include (1) significant loan seasoning and relative clean performance history in recent years, (2) a comprehensive due diligence review and (3) a strong representations and warranties enforcement mechanism, including delinquency review trigger and breach reserve accounts.

The lack of principal and interest advances on delinquent mortgages may increase the possibility of periodic interest shortfalls to the Noteholders; however, principal proceeds can be used to pay interest to the Notes sequentially, and subordination levels are greater than expected losses, which may provide for timely payment of interest to the rated Notes.

The full description of the strengths, challenges and mitigating factors are detailed in the related report. Please see the attached appendix for additional information regarding sensitivity of assumptions used in the rating process.

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

The applicable methodologies are RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, Unified Interest Rate Model for Rating U.S. Structured Finance Transactions, Third-Party Due Diligence Criteria for U.S. RMBS Transactions, Representations and Warranties Criteria for U.S. RMBS Transactions and Legal Criteria for U.S. Structured Finance, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.