DBRS Finalizes, Assigns Ratings to Towd Point Mortgage Trust 2016-5

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following Asset Backed Securities, Series 2016-5 (the Notes) issued by Towd Point Mortgage Trust 2016-5 (the Trust):

-- $349.5 million Class A1 at AAA (sf)
-- $35.3 million Class A2 at AA (sf)

DBRS has also assigned ratings to the following Notes issued by the Trust:

-- $30.9 million Class M1 at A (sf)
-- $27.1 million Class M2 at BBB (sf)
-- $23.3 million Class B1 at BB (sf)
-- $19.5 million Class B2 at B (sf)

These rating actions are the result of DBRS applying its updated “RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” published in November 2016.

The AAA (sf) ratings on the Notes reflect the 35.60% of credit enhancement provided by subordinated Notes in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect credit enhancement of 29.10%, 23.40%, 18.40%, 14.10% and 10.50%, 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 seasoned performing and re-performing first-lien residential mortgages. The Notes are backed by approximately 2,498 loans with a total principal balance of $542,736,293 as of the Cut-Off Date (November 30, 2016).

As of the Statistical Calculation Date (October 31, 2016), the portfolio contains approximately 2,517 loans with a total principal balance of $550,277,424. All the below statistics regarding the mortgage loans are based on the Statistical Calculation Date. The portfolio contains 77.8% modified loans. Within the pool, 548 mortgages have non-interest-bearing deferred amounts, which equates to 3.9% of the total principal balance as of the Cut-Off Date. The modifications happened more than two years ago for 93.5% of the modified loans. The loans are approximately 115 months seasoned. The pool has 104 mortgages that have a current or prior delinquency related to a servicing transfer. After excluding delinquencies that may be related to servicing transfers, all loans (100.0%) were current as of the Statistical Calculation Date, including 0.8% bankruptcy-performing loans. Approximately 69.2% 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. In accordance with the CFPB Qualified Mortgage (QM) rules, 3.0% of the loans are designated as QM Safe Harbor, 0.5% as QM Rebuttable Presumption and 0.1% as non-QM. Approximately 96.4% of the loans are not subject to the QM rules.

FirstKey Mortgage, LLC (FirstKey) will acquire the loans from various transferring trusts on or prior to the Closing Date. The transferring trusts acquired the mortgage loans between 2013 and 2016 and are beneficially owned by both the Responsible Party and other funds managed by affiliates of Cerberus Capital Management, L.P. Upon acquiring the loans from the transferring trusts, FirstKey, through a wholly owned subsidiary, Towd Point Asset Funding, LLC, 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. These loans were originated and previously serviced by various entities through purchases in the secondary market. As of the Cut-Off Date, all loans are serviced by Select Portfolio Servicing, Inc.

There will not be any advancing of delinquent principal or interest on any mortgages by the servicer or any other party to the transaction; however, the servicer is 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 to maximize liquidation proceeds of such loans or 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, strong servicers 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. Servicing comments were reviewed for a sample of loans. 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 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 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 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, Operational Risk Assessment for U.S. RMBS Originators, Operational Risk Assessment for U.S. RMBS Servicers 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 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.