DBRS Assigns Provisional Ratings to Galton Funding Mortgage Trust 2017-1

DBRS, Inc. (DBRS) has today assigned the following provisional ratings to the Mortgage Pass-Through Certificates, Series 2017-1 (the Certificates) issued by Galton Funding Mortgage Trust 2017-1 (GFMT 2017-1 or the Trust):

-- $220.2 million Class A11 at AAA (sf)
-- $220.2 million Class AX11 at AAA (sf)
-- $220.2 million Class A12 at AAA (sf)
-- $220.2 million Class AX12 at AAA (sf)
-- $220.2 million Class A13 at AAA (sf)
-- $220.2 million Class AX13 at AAA (sf)
-- $203.6 million Class A21 at AAA (sf)
-- $203.6 million Class AX21 at AAA (sf)
-- $203.6 million Class A22 at AAA (sf)
-- $203.6 million Class AX22 at AAA (sf)
-- $203.6 million Class A23 at AAA (sf)
-- $203.6 million Class AX23 at AAA (sf)
-- $16.5 million Class A31 at AAA (sf)
-- $16.5 million Class AX31 at AAA (sf)
-- $16.5 million Class A32 at AAA (sf)
-- $16.5 million Class AX32 at AAA (sf)
-- $16.5 million Class A33 at AAA (sf)
-- $16.5 million Class AX33 at AAA (sf)
-- $152.7 million Class A41 at AAA (sf)
-- $152.7 million Class AX41 at AAA (sf)
-- $152.7 million Class A42 at AAA (sf)
-- $152.7 million Class AX42 at AAA (sf)
-- $152.7 million Class A43 at AAA (sf)
-- $152.7 million Class AX43 at AAA (sf)
-- $50.9 million Class A51 at AAA (sf)
-- $50.9 million Class AX51 at AAA (sf)
-- $50.9 million Class A52 at AAA (sf)
-- $50.9 million Class AX52 at AAA (sf)
-- $50.9 million Class A53 at AAA (sf)
-- $50.9 million Class AX53 at AAA (sf)
-- $16.5 million Class X3 at AAA (sf)
-- $152.7 million Class X4 at AAA (sf)
-- $50.9 million Class X5 at AAA (sf)
-- $8.5 million Class B1 at AA (sf)
-- $8.5 million Class BX1 at AA (sf)
-- $10.8 million Class B2 at A (low) (sf)
-- $10.8 million Class BX2 at A (low) (sf)
-- $6.1 million Class B3 at BBB (low) (sf)
-- $6.1 million Class BX3 at BBB (low) (sf)
-- $2.5 million Class B4 at BB (sf)
-- $3.3 million Class B5 at B (sf)

Classes AX11, AX12, AX13, AX21, AX22, AX23, AX31, AX32, AX33, AX41, AX42, AX43, AX51, AX52, AX53, X3, X4, X5, BX1, BX2 and BX3 are interest-only (IO) certificates. The class balances represent notional amounts.

Classes A11, AX11, A12, AX12, A13, AX13, A21, AX21, A22, AX22, A23, AX23, A31, AX32, A33, A41, AX42, A43, A51, AX52, A53 are exchangeable certificates. These classes can be exchanged for combinations of exchange certificates as specified in the offering documents.

The AAA (sf) ratings on the Certificates reflect the 13.50% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (low) (sf), BBB (low) (sf), BB (sf) and B (sf) ratings reflect 10.15%, 5.90%, 3.50%, 2.50% and 1.20% of credit enhancement, respectively.

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

This transaction is a securitization of a portfolio of mostly expanded prime qualified mortgage (QM) and non-QM first-lien residential mortgages. The Certificates are backed by 363 loans with a total principal balance of $254,554,479 as of the Cut-Off Date (February 1, 2017).

The mortgage loans were originally acquired by GMRF Mortgage Acquisition Company LLC (the Sponsor) directly from either originators or a third-party aggregator. The Sponsor is a wholly owned subsidiary of Galton Mortgage Recovery Master Fund III, L.P.

The majority of the loans in this securitization (92.3%) are Credit Grade A+ (Galton Program) borrowers with unblemished credit who may not meet prime jumbo or agency/government guidelines. While certain attributes are comparable with post-crisis prime transactions, the loans in the GFMT 2017-1 portfolio may have IO features, higher debt-to-income (DTI) and loan-to-value (LTV) ratios, lower credit scores and barbelled distribution of certain characteristics as compared with recent prime securitizations. However, the overall credit profile of the Galton pool is much stronger than those of other non-QM programs rated by DBRS.

The originators for the mortgage pool are Priority Financial Network (17.6%); Parkside Lending, LLC (16.2%); RPM Mortgage, Inc. (15.3%); Oaktree Funding Corp. (14.9%); PHH Mortgage Corp. (5.6%); and various other originators, each comprising less than 5.0% of the mortgage loans. The loans will be serviced by New Penn Financial, LLC doing business as (dba) Shellpoint Mortgage Servicing. Galton Mortgage Loan Seller LLC (GMLS) will act as the Servicing Administrator.

Wells Fargo Bank, N.A. (Wells Fargo; rated AA (high) with a Negative trend by DBRS) will act as the Master Servicer, Securities Administrator and Custodian. Wilmington Savings Fund Society, FSB, dba Christiana Trust, will serve as Trustee.

In accordance with the CFPB QM rules, 22.3% of the loans are designated as QM Safe Harbor, 9.1% as QM Rebuttable Presumption and 35.1% as non-QM. Approximately 33.6% of the loans are not subject to the QM rules.

The Servicing Administrator will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 120 days delinquent and is obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties.

The transaction employs a senior-subordinate shifting-interest cash flow structure that has been modified to allow available funds to pay interest to the Class B1 and BX1 Certificates before paying principal to the Senior Certificates.

The ratings reflect transactional strengths, including the following:

(1) Satisfactory Underwriting Standards: Underwriting standards have improved significantly from the pre-crisis era. The majority of loans in this transaction (78.5%) were underwritten to a full documentation standard with respect to verification of income (generally through two years of W-2 forms or personal tax statements), employment and assets. Some self-employed borrowers in this pool were underwritten for income verification using 24 months of bank statements (22.6% of the pool) and 12 months of bank statements (24.1% of the pool). These borrowers have also provided evidence of self-employment in the same business for the past two years with a business narrative, as needed. For loans that were underwritten to a less-than-full documentation standard, borrowers were required to have stronger credit profiles or more equity in their properties compared with a full-documentation loan. Nonetheless, DBRS penalized such less-than-full documentation loans by assigning lower documentation grades, which resulted in higher expected losses for such loans.

(2) Robust Pool Composition: The loans in the pool, for the most part, have relatively low LTV and DTI ratios and are made to borrowers with robust FICO scores, incomes and reserves. The pool is composed of loans with a weighted-average (WA) FICO score (based on the lower of primary borrower and co-borrower’s refreshed FICO scores) of 744 and WA original combined LTV (CLTV) of 67.6%. The borrowers have a WA DTI of 31.9% with WA reserves of approximately $563,010 and WA annual income (primary borrower) of approximately $444,318. Additionally, 93.4% of the pool consists of fixed-rate loans, with only 6.1% having IO features. Although, when compared with prime jumbo transactions, certain loan attributes, such as LTV ratios and FICO scores, have a more barbelled distribution, the Galton guidelines have compensating factors, such as capping the DTI ratio or requiring additional reserves for the riskier loans.

(3) 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.

(4) Satisfactory Loan Performance to Date (Albeit Short): Galton established the conduit and commenced activity in September 2014. The first loan was acquired by the conduit in January 2015. Of approximately 575 first-lien mortgages that were aggregated as of December 2016, only four loans were ever 30 days delinquent (excluding any servicing transfer issues), and these loans self-cured shortly after.

(5) 100% Current Loans: All loans are current as of the Cut-Off Date. Additionally, no loan in the securitization has had prior delinquencies since origination.

The transaction also includes the following challenges and mitigating factors:

(1) Geographic Concentration: This transaction has a high concentration of loans in California (CA), which represents 76.5% of the loans in the transaction. Performance of loans that are highly concentrated in a particular region may be more sensitive to any deterioration in economic conditions or the occurrence of a natural disaster in that region. Some mitigating factors include the following:
(a) DBRS’s RMBS Insight model generates an elevated asset correlation, as determined by loan size and geographic concentration, for this portfolio compared with pools with similar collateral, resulting in higher expected losses across rating categories.
(b) There is metropolitan statistical area (MSA) diversity in the pool for the loans from California.
(c) Nonetheless, DBRS believes that the elevated concentration of Los Angeles loans demands additional penalties and credit protection. DBRS applied the following stresses in its RMBS Insight model, which increases the expected losses for the loans located in the Los Angeles area:
(i) Increased the market value decline assumption for all properties in the Los Angeles area by an additional 50% at each rating category.
(ii) Increased the unemployment rate stress for borrowers in the Los Angeles area.

(2) QM Rebuttable Presumption, Non-QM and Investor Loans: This portfolio contains QM Rebuttable Presumption or non-QM loans, as well as a significant concentration of investor loans. Some mitigating factors include the following:
(a) All loans were originated to meet the eight underwriting factors as required by the ATR rules. The loans were also underwritten to comply with the standards set forth in Appendix Q.
(b) Underwriting standards have improved substantially since the pre-crisis era.
(c) The DBRS RMBS Insight model incorporates loss severity penalties for non-QM and QM Rebuttable Presumption loans, as explained further in the Key Loss Severity Drivers section of the report for this transaction.
(d) Investor loans represent higher default risk (1.2 times (x) to 1.8x penalty) relative to owner-occupied loans holding other attributes constant. In addition, investor loans in this pool have a better credit profile than the overall pool, with a WA FICO of 758, WA original CLTV of 56.0%, WA DTI of 31.1% and substantial liquid reserves at approximately $403,222. Finally, the Galton guidelines have certain LTV caps and FICO floors for investor properties.

(3) Representations and Warranties Framework: This transaction employs a standard that includes materiality factors. Some of the originators in the transaction may have limited history in securitizations and/or may potentially experience financial stress that could result in their inability to fulfill repurchase obligations as a result of breaches of representations and warranties. This transaction provides the following mitigating factors:
(a) Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations.
(b) The mortgage loans benefit from representations and warranties backstopped by GMLS in the event of an originator’s bankruptcy or insolvency proceeding and if the originator fails to cure, repurchase or substitute loans for such a breach.
(c) The performance of the aggregated collateral, although limited in history, has been satisfactory to date.
(d) Automatic reviews on certain representations are triggered on any loan that becomes 120 days delinquent or any loan that has incurred a cumulative loss.
(e) The reviewer is required to review any triggered loans for breaches of representations and warranties in accordance with predetermined procedures and processes.
(f) Certain disputes are ultimately subject to the determination made in a related arbitration proceeding.
(g) Notwithstanding the above, DBRS reduced the originator scores, which resulted in higher expected losses.

(4) Advances of Delinquent P&I: The Servicing Administrator will advance scheduled P&I on delinquent mortgages until such loans become 120 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 available funds are used to pay interest to the Senior Certificates and Class B1 and Class B1X Certificates before paying principal to the Senior Certificates and 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 120 days for delinquent loans; the cash flow scenarios are discussed in more detail in the Cash Flow Analysis section of the report for this transaction.

(5) Servicing Administrator’s Financial Capability: In this transaction, the Servicing Administrator is responsible for funding advances to the extent required. The Servicing Administrator is an unrated entity and may face financial difficulties in fulfilling its servicing advance obligation in the future. Consequently, the transaction employs Wells Fargo as the Master Servicer. If the Servicing Administrator 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 by the legal final maturity date in accordance with the terms and conditions of the related Certificates. The DBRS ratings of A (low) (sf ), BBB (low) (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 report for this transaction. Please see the related appendix for additional information regarding the 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 and Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules, which can be found on dbrs.com 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.