DBRS Assigns Provisional Ratings to Mill City Mortgage Loan Trust 2017-3

DBRS, Inc. (DBRS) assigned provisional ratings to the Mortgage Backed Securities, Series 2017-3 (the Notes) issued by Mill City Mortgage Loan Trust 2017-3 (the Trust) as follows:

-- $278.7 million Class A1 at AAA (sf)
-- $303.7 million Class A2 at AA (sf)
-- $331.9 million Class A3 at A (sf)
-- $355.7 million Class A4 at BBB (sf)
-- $24.9 million Class M1 at AA (sf)
-- $28.2 million Class M2 at A (sf)
-- $23.9 million Class M3 at BBB (sf)
-- $17.4 million Class B1 at BB (sf)
-- $17.4 million Class B2 at B (sf)

Classes A2, A3 and A4 are exchangeable notes. These classes can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) rating on the Notes reflects 35.75% of credit enhancement provided by subordinated Notes in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 30.00%, 23.50%, 18.00%, 14.00% and 10.00% 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 primarily first-lien, seasoned, performing and re-performing residential mortgages and home equity lines of credit (HELOC) mortgage loans. The Notes are backed by 1,665 loans with a total principal balance of approximately $433,817,744 as of the Cut-Off Date (August 31, 2017).

The loans are approximately 123 months seasoned and all are current as of the Cut-Off Date, including 24 bankruptcy-performing loans. Under the Mortgage Bankers Association’s delinquency method, approximately 49.1% of the pool has been zero times 30 days delinquent (0 x 30) for the past 24 months, 78.4% has been 0 x 30 for the past 12 months and 88.2% has been 0 x 30 for the past six months.

The portfolio contains 70.5% modified loans. Within the pool, 578 loans have non-interest-bearing deferred amounts, which equates to 5.9% of the total principal balance as of the Cut-Off Date. The modifications happened more than two years ago for 74.8% of the modified loans. In accordance with the Consumer Financial Protection Bureau Qualified Mortgage (QM) rules, 5.4% of the loans are designated as QM Safe Harbor, 0.5% as QM Rebuttable Presumption and 0.3% as non-QM. Approximately 93.9% of the loans are not subject to the QM rules.

Approximately 11.7% of the pool is comprised of HELOCs, of which 99.8% are first liens and 0.2% are second liens. These loans have a fixed credit limit for a 120-month draw period and then amortize for the remaining 240 months subject to a decreasing credit limit. HELOC borrowers may make draws on the mortgage up to the credit limit until maturity, which will increase the current principal balance of such loans. In addition, HELOC borrowers may also experience payment shocks when the amortization period begins. As of the Closing Date, Mill City Depositor, LLC (the Depositor) will fund a HELOC Draw Reserve Account to purchase future draws from the related servicer.

Through a series of transactions, Mill City Holdings, LLC (Mill City) will acquire the mortgage loans on the Closing Date. Prior to the Closing Date, the loans were held in one or more trusts that acquired the mortgage loans between 2013 and 2017. Such trusts are entities of which the Representation Provider or an affiliate thereof holds an indirect interest. Upon acquiring the loans, Mill City, through a wholly owned subsidiary (the Depositor), will contribute loans to the Trust. As the Sponsor, Mill City will acquire and retain a 5.0% 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 Mortgage Servicing doing business as Shellpoint Mortgage Servicing (81.7%), Fay Servicing, LLC (9.5%) and Select Portfolio Servicing, Inc. (8.7%).

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