DBRS Finalizes Provisional Ratings on COLT 2016-3 Mortgage Loan Trust

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the Mortgage Pass-Through Certificates, Series 2016-3 (the Certificates) issued by COLT 2016-3 Mortgage Loan Trust (the Trust):

-- $129.9 million Class A-1 at AAA (sf)
-- $26.8 million Class A-2 at AA (sf)
-- $37.1 million Class A-3 at A (sf)
-- $9.8 million Class M-1 at BBB (sf)
-- $7.2 million Class B-1 at BB (sf)
-- $7.1 million Class B-2 at B (sf)

The AAA (sf) ratings on the Certificates reflect the 42.45% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 30.60%, 14.15%, 9.80%, 6.60% and 3.45% 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 fixed- and adjustable-rate, prime and non-prime, first-lien residential mortgages. The Certificates are backed by 474 loans with a total principal balance of $225,745,589 as of the Cut-Off Date (December 1, 2016).

Caliber Home Loans, Inc. (Caliber) is the originator and servicer for 71.2% of the portfolio. The Caliber mortgages were originated under the following five programs:
(1) Jumbo Alternative (31.2%) – Generally made to borrowers with unblemished credit who do not meet strict prime jumbo or agency/government guidelines. These loans may have interest-only (IO) features, higher debt-to-income (DTI) and loan-to-value (LTV) ratios, or lower credit scores as compared with those in traditional prime jumbo securitizations.

(2) Homeowner’s Access (29.8%) – Made to borrowers who do not qualify for agency or prime jumbo mortgages for various reasons, such as loan size in excess of government limits, alternative or insufficient credit, or prior derogatory credit events that occurred more than two years prior to origination.

(3) Fresh Start (8.8%) – Made to borrowers with lower credit and significant recent credit events within the past 24 months.

(4) Investor (1.3%) – Made to borrowers who finance investor properties where the mortgage loan would not meet agency or government guidelines because of such factors as property type, number of financed properties, lower borrower credit score or a seasoned credit event.

(5) Foreign National (0.2%) – Made to non-resident borrowers holding certain types of visas who may not have a credit score.

Sterling Bank and Trust, FSB (Sterling) is the originator and servicer for 22.3% of the portfolio. The Sterling mortgages were originated under Sterling’s Advantage Home Ownership Program (Advantage), which focuses on high-quality borrowers with clean mortgage payment histories and substantial equity in their properties who seek alternative income documentation products. LendSure Mortgage Corp. (LendSure) originated approximately 6.5% of the pool through its wholesale lending network, all of which is serviced by Caliber.

Wells Fargo Bank, N.A. (Wells Fargo) will act as the Master Servicer, Securities Administrator and Certificate Registrar. U.S. Bank National Association will serve as Trustee.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ability-to-repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government or private-label, non-agency prime jumbo products for the various reasons described above. In accordance with the CFPB Qualified Mortgage (QM) rules, 0.7% of the loans are designated as QM Safe Harbor, 31.1% as QM Rebuttable Presumption and 61.7% as non-QM. Approximately 6.5% of the loans are not subject to the QM rules.

The servicers will generally fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent, and they are obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties.

On or after the two-year anniversary of the Closing Date, the Depositor has the option to purchase all of the outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Certificates as the outstanding senior Certificates are paid in full.

The ratings reflect transactional strengths that include the following:
(1) ATR Rules and Appendix Q Compliance: All of the mortgage loans were underwritten in accordance with the eight underwriting factors of the ATR rules. In addition, Caliber’s underwriting standards comply with the Standards for Determining Monthly Debt and Income as set forth in Appendix Q of Regulation Z with respect to income verification and the calculation of DTI ratios. All but one of the LendSure-originated loans are Appendix Q-compliant as well.

(2) Strong Underwriting Standards: Whether for prime or non-prime mortgages, underwriting standards have improved significantly from the pre-crisis era. The Caliber loans were underwritten to a full documentation standard with respect to verification of income (generally through two years of W-2s or tax returns), employment and asset. Generally, fully executed 4506-Ts are obtained, and tax returns are verified with IRS transcripts if applicable. Although loans in the Sterling Advantage program were underwritten to limited documentation standards, borrowers are required to have strong credit profiles, substantial equity in their properties and generally no delinquencies in the past 12 months. The Sterling loans were all originated through the retail channel and have a weighted-average original combined LTV (CLTV) of 61.7%.

(3) Robust Loan Attributes and Pool Composition:
-- The mortgage loans in this portfolio generally have robust loan attributes as reflected in CLTV ratios, borrower household income and liquid reserves, including the loans in Homeowner’s Access and Fresh Start, the two programs with weaker borrower credit.
-- The pool contains low proportions of cash-out and investor properties.
-- LTVs gradually reduce as the programs move down the credit spectrum, suggesting the consideration of compensating factors for riskier pools.
-- The pool comprises 25.7% fixed-rate mortgages, which have the lowest default risk due to the stability of monthly payments. The pool comprises 68.5% hybrid adjustable-rate mortgages (ARMs) with an initial fixed period of five to seven years, allowing borrowers sufficient time to credit cure before rates reset. Only 5.8% of the pool are hybrid ARMs with an initial fixed period of three years.

(4) Satisfactory Third-Party Due Diligence Review: A third-party due diligence firm conducted property valuation, credit and compliance reviews on 100.0% of the loans in the pool. Data integrity checks were also performed on the pool.

(5) Satisfactory Loan Performance to Date (Albeit Short): Of the approximately 1,621 mortgages originated to date, only 32 were ever 30 days delinquent, which generally self-cured shortly after.
Four loans have been 60 days delinquent, and two loans have been 90 days delinquent. Sterling’s Advantage portfolio has experienced no delinquencies since October 2011, and Sterling’s servicing portfolio maintains low delinquency rates of 0.06% as of October 2016. In addition, voluntary prepayment rates have been relatively high, as these borrowers tend to credit cure and refinance into lower-cost mortgages.

The transaction also includes the following challenges and mitigating factors:
(1) Representations and Warranties (R&W) Framework and Provider: The R&W framework is considerably weaker compared with that of a post-crisis prime jumbo securitization. Instead of an automatic review when a loan becomes seriously delinquent, this transaction employs an optional review only when realized losses occur (unless the alleged breach relates to an ATR or TRID violation). In addition, rather than engaging a third-party due diligence firm to perform the R&W review, the Controlling Holder (initially the Sponsor or a majority-owned affiliate of the Sponsor) has the option to perform the review in house or use a third-party reviewer. Finally, the R&W providers (the originators) are unrated entities, have limited performance history of non-prime, non-QM securitizations and may potentially experience financial stress that could result in the inability to fulfill repurchase obligations. DBRS notes the following mitigating factors:
-- The holders of Certificates representing 25.0% interest in the Certificates may direct the Trustee to commence a separate review of the related mortgage loan, to the extent that they disagree with the Controlling Holder’s determination of a breach.
-- Third-party due diligence was conducted on 100.0% of the loans included in the pool. A comprehensive due diligence review mitigates the risk of future R&W violations.
-- DBRS conducted on-site originator (and servicer) reviews of Caliber and Sterling and deems them to be operationally sound.
-- The Sponsor or an affiliate of the Sponsor will retain the Class B-2, Class B-3 and Class X Certificates, which represent at least 5.0% of the fair value of all the Certificates, aligning Sponsor and investor interest in the capital structure.
-- Notwithstanding the above, DBRS adjusted the originator scores downward to account for the potential inability to fulfill repurchase obligations, the lack of performance history as well as the weaker R&W framework. A lower originator score results in increased default and loss assumptions and provides additional cushions for the rated securities.

(2) Non-Prime, QM-Rebuttable Presumption or Non-QM Loans: Compared with post-crisis prime jumbo transactions, this portfolio contains some mortgages originated to borrowers with weaker credit and prior derogatory credit events as well as QM-rebuttable presumption or non-QM loans.
-- All loans were originated to meet the eight underwriting factors as required by the ATR rules. The Caliber loans were also underwritten to comply with the standards set forth in Appendix Q. All but one of the LendSure-originated loans are Appendix Q-compliant as well.
-- Underwriting standards have improved substantially since the pre-crisis era.
-- DBRS RMBS Insight Model incorporates loss severity penalties for non-QM and QM Rebuttable Presumption loans as explained in the Key Loss Severity Drivers section of the related report.
-- For loans in this portfolio that were originated through the Homeowner’s Access and Fresh Start programs, borrower credit events had generally happened 42 months and 26 months, respectively, prior to origination, on average. In its analysis, DBRS applies additional penalties for borrowers with recent credit events within the past two years.

(3) Servicer Advances of Delinquent Principal and Interest (P&I): The servicers will advance scheduled P&I on delinquent mortgages until such loans become 180 days delinquent. This will likely result in lower loss severities to the transaction because advanced P&I will not have to be reimbursed from the trust upon the liquidation of the mortgages, but will increase the possibility of periodic interest shortfalls to the Certificateholders. Mitigating factors include that principal proceeds can be used to pay interest shortfalls to the Certificates as the outstanding senior Certificates are paid in full as well as the fact that subordination levels are greater than expected losses, which may provide for payment of interest to the Certificates. DBRS ran cash flow scenarios that incorporated P&I advancing up to 180 days for delinquent loans; the cash flow scenarios are discussed in more detail in the Cash Flow Analysis section of the related report.

(4) Servicers’ Financial Capability: In this transaction, the servicers, Caliber and Sterling, are responsible for funding advances to the extent required. The servicers are unrated entities and may face financial difficulties in fulfilling its servicing advance obligation in the future. Consequently, the transaction employs Wells Fargo, rated AA (high) by DBRS, as the Master Servicer. If a servicer fails in its obligation to make advances, Wells Fargo will be obligated to fund such servicing advances.

The DBRS ratings of AAA (sf) and AA (sf) address the timely payment of interest and full payment of principal (excluding IO classes) by the legal final maturity date in accordance with the terms and conditions of the related Certificates. 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 Certificates.

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, Legal Criteria for U.S. Structured Finance, Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules, Operational Risk Assessment for U.S. RMBS Originators and Operational Risk Assessment for U.S. RMBS Servicers, 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.