DBRS Finalizes Provisional Ratings on COLT 2017-1 Mortgage Loan Trust

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the Mortgage Pass-Through Certificates, Series 2017-1 (the Certificates) issued by COLT 2017-1 Mortgage Loan Trust (the Trust) as follows:

-- $265.3 million Class A-1 at AAA (sf)
-- $33.2 million Class A-2 at AA (sf)
-- $47.3 million Class A-3 at A (sf)
-- $16.5 million Class M-1 at BBB (sf)
-- $15.1 million Class B-1 at BB (sf)
-- $10.7 million Class B-2 at B (sf)

The AAA (sf) ratings on the Certificates reflect the 34.10% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 25.85%, 14.10%, 10.00%, 6.25% and 3.60% 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 853 loans with a total principal balance of $402,646,289 as of the Cut-Off Date (April 1, 2017).

Caliber Home Loans, Inc. (Caliber) is the originator and servicer for 78.3% of the portfolio. The Caliber mortgages were originated under the following five programs:
(1) Premier Access (40.8%) – Generally made to borrowers with unblemished credit seeking larger balance mortgages. These loans may have interest-only features, higher debt-to-income (DTI) and loan-to-value (LTV) ratios or lower credit scores compared with those in traditional prime jumbo securitizations.

(2) Homeowner’s Access (23.9%) – 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 (10.2%) – Made to borrowers with lower credit and significant recent credit events within the past 24 months.

(4) Investor (2.9%) – 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 (0.4%) – 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 21.7% 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.

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 various reasons described above. In accordance with the CFPB Qualified Mortgage (QM) rules, 1.3% of the loans are designated as QM Safe Harbor, 26.1% as QM Rebuttable Presumption and 69.3% as non-QM. Approximately 3.3% 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 earlier of (1) the two-year anniversary of the Closing Date and (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 20% of the Cut-Off Date balance, 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.

(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 primarily 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 (WA) original CLTV of 61.6%.

(3) Robust Loan Attributes and Pool Composition:
-- The mortgage loans in this portfolio generally have robust loan attributes as reflected in combined LTV 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.
-- As the programs move down the credit spectrum, certain characteristics, such as lower LTVs or DTIs, suggest the consideration of compensating factors for riskier pools.
-- The pool is comprised of 25.9% fixed-rate mortgages, which have the lowest default risk because of the stability of monthly payments. The pool is comprised of 56.4% hybrid adjustable-rate mortgages (ARMs) with an initial fixed period of five to ten years, allowing borrowers sufficient time to credit cure before rates reset. The pool also includes hybrid ARMs with initial fixed periods of one year (9.9%) and three years (7.8%), all originated by Sterling.

(4) Satisfactory Third-Party Due Diligence Review: A third-party due diligence firm conducted property valuation, credit and compliance reviews on 100% of the loans in the pool. Data integrity checks were also performed on the pool.

(5) Satisfactory Loan Performance to Date (Albeit Short): Caliber began originating loans under the five programs in Q4 2014. Since the first transaction issued in November 2015, the historical performance for the COLT shelf has been robust, albeit short. For the four previous non-QM transactions issued from the COLT shelf, as of March 2017, 60+ day delinquency rates ranged from 0.0% to 2.4% and cumulative losses ranged from 0.0% to 0.05%. In addition, voluntary prepayment rates have been relatively high, as these borrowers tend to credit cure and refinance into lower-rate 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 (each originator) 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% interest in the Certificates may direct the Trustee to commence a separate review of the related mortgage loan, to the extent they disagree with the Controlling Holder’s determination of a breach.
-- Third-party due diligence was conducted on 100% 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% 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: As 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.
-- 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 further in the Key Loss Severity Drivers section of the related rating report.
-- For loans in this portfolio that were originated through the Homeowner’s Access and Fresh Start programs, borrower credit events had generally happened, on average, 36 months and 18 months, respectively, prior to origination. 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: The servicers will advance scheduled principal and interest on delinquent mortgages until such loans become 180 days delinquent. This will likely result in lower loss severities to the transaction because advanced principal and interest 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 principal and interest 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 rating 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 their servicing advance obligations 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 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 is detailed in the related rating 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 principal methodologies are RMBS Insight 1.3: 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, Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules, Operational Risk Assessment for U.S. RMBS Originators, Operational Risk Assessment for U.S. RMBS Servicers, 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.