DBRS Assigns Provisional Ratings to Mill City Mortgage Loan Trust 2016-1

DBRS, Inc. (DBRS) has today assigned provisional ratings to the Mortgage Backed Securities, Series 2016-1 (the Notes) issued by Mill City Mortgage Loan Trust (the Trust):

-- $322.2 million Class A1 at AAA (sf)
-- $32.5 million Class M1 at AA (sf)
-- $27.8 million Class M2 at A (sf)
-- $21.9 million Class M3 at BBB (sf)
-- $25.0 million Class B1 at BB (sf)
-- $19.7 million Class B2 at B (sf)

The AAA (sf) ratings on the Notes reflect 36.15% of credit enhancement provided by subordinated Notes in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 29.70%, 24.20%, 19.85%, 14.90% and 11.00% of credit enhancement, respectively.

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 first-lien, seasoned, performing and re-performing residential mortgages. The Notes are backed by 1,986 loans with a total principal balance of approximately $504,545,264 as of the Cut-Off Date (July 31, 2016).

The loans are approximately 113 months seasoned and all are current as of the Cut-Off Date, including 36 bankruptcy-performing loans. Approximately 79.2% and 94.5% of the mortgage loans have been zero times 30 days delinquent for the past 24 months under the Mortgage Banker Associations and the Office of Thrift Supervision delinquency methods, respectively.

The portfolio contains 70.1% modified loans. Within the pool, 520 loans have non-interest-bearing deferred amounts, which equates to 3.87% of the total principal balance as of the Cut-Off Date. The modifications happened more than two years ago for 93.8% of the modified loans. In accordance with the Consumer Financial Protection Bureau Qualified Mortgage (QM) rules, 0.3% of the loans are designated as QM Safe Harbor, less than 0.1% as QM Rebuttable Presumption and 0.1% as non-QM. Approximately 99.5% of the loans are not subject to the QM rules.

Mill City Holdings, LLC (Mill City) will acquire the loans from four transferring trusts on the Closing Date. The transferring trusts acquired the mortgage loans between 2013 and 2016 and are entities of which the Representation Provider or an affiliate thereof holds an indirect interest. Upon acquiring the loans from the transferring trusts, Mill City, through a wholly owned subsidiary, Mill City Depositor, LLC, will contribute loans to the Trust. As the Sponsor, Mill City 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, the loans are serviced by Resurgent doing business as Shellpoint Mortgage Servicing (71.3%) and Fay Servicing, LLC (28.7%).

There will not be any advancing of delinquent principal or interest on any mortgages by the servicers or any other party to the transaction; 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.

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 M2 and more subordinate bonds will not be paid until the more senior classes are retired.

The ratings reflect transactional strength in that the underlying assets have generally performed well through the crisis. Additionally, a satisfactory third-party due diligence review was performed on the portfolio with respect to regulatory compliance, payment history, data capture as well as title and lien review. Updated broker price opinions or exterior appraisals were provided for 100.0% 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 provider (CVI CVF III Lux Master S.à.r.l.), 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 representations and warranties enforcement mechanism, including a delinquency review trigger and a breach reserve account.

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 DBRS ratings of AAA (sf) and AA (sf) address the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Notes. The DBRS ratings of A (sf), BBB (sf), BB (sf) and B (sf) address the ultimate payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Notes.

The full description of the strengths, challenges and mitigating factors are detailed in the related presale report. Please see the related 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 rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

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