DBRS Assigns Provisional Ratings to Ajax Mortgage Loan Trust 2017-B

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

-- $115.8 million Class A at AA (sf)
-- $9.8 million Class M-1 at A (sf)
-- $9.5 million Class M-2 at BBB (sf)

The AA (sf), A (sf) and BBB (sf) ratings on the Notes reflect 30.15%, 24.25% and 18.55%, respectively, of credit enhancement provided by subordinated Notes and the Trust Certificate.

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 funded by the issuance of residential mortgage-backed notes. The Notes are backed by 786 loans with a total principal balance of $165,850,278 as of the Cut-Off Date (November 30, 2017).

The portfolio is approximately 133 months seasoned. As of the Cut-Off Date, 91.9% of the pool is current, 5.7% is 30 days delinquent under the Mortgage Bankers Association (MBA) delinquency method and 1.1% is 60 days delinquent. Additionally, 1.3% of the pool is in bankruptcy, 88.5% of which is bankruptcy-performing and 11.5% is 30 days delinquent. Approximately 60.9% and 75.0% of the mortgage loans have been zero times 30 days delinquent for the past 24 months and 12 months, respectively, under the MBA delinquency method.

The pool contains 87.4% modified loans. The modifications happened more than two years ago for 99.1% of the modified loans. Within the pool, 268 mortgages (36.8% of the pool) have non-interest-bearing deferred amounts, which equates to 9.8% of the total principal balance. Because of the seasoning of the collateral, none of the loans are subject to the Consumer Financial Protection Bureau’s Qualified Mortgage Ability-to-Repay rules.

Prior to the Closing Date (December 21, 2017), Great Ajax Operating Partnership LP (Ajax), in its capacity as the Sponsor, acquired the loans from various unaffiliated third-party sellers. To satisfy the credit risk retention requirements, the Sponsor and the Depositor (a majority-owned affiliate of the Sponsor) will retain at least a 5% eligible horizontal interest in the Notes.

As of the Cut-Off Date, Gregory Funding LLC is the Servicer of all the loans in this pool.

Since 2013, Ajax and its affiliates have issued 16 securitizations under the Ajax shelf prior to Ajax 2017-B. These issuances were backed by seasoned, re-performing or non-performing loans. None of the previously issued Ajax deals were rated by DBRS. DBRS reviewed the historical performance of the Ajax shelf; however, the non-rated deals generally exhibit much worse collateral attributes than Ajax 2017-B with regards to delinquencies at issuance. The prior Ajax transactions currently exhibit high levels of delinquencies and losses, which are expected given the nature of these severely distressed assets.

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 real estate assessments, taxes and insurance and 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 M-1 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 rated Notes, and subordination levels are greater than expected losses, which may provide for interest payments to the rated Notes.

Beginning two years after the Closing Date, the Issuer has the option to redeem all of the Notes at a price equal to the remaining note amount of the Notes plus accrued and unpaid interest and any unpaid expenses and reimbursement amounts (Aggregate Redemption Price). Additionally, beginning two years after the Closing Date, the Issuer may, at its option, redeem one or more of the most senior Notes outstanding at a price (Class Redemption Price) for each class equal to the sum of the remaining note amount of such Notes and any accrued and unpaid interest due through the redemption date. When the rated Notes are outstanding, the Issuer has the option to sell any mortgage loan to an affiliate or non-affiliate for so long as the proceeds of such sale is equal to the aggregate outstanding note amount of the rated Notes and, beginning with the second payment date, certain post-sale debt enhancement requirements are met.

The ratings reflect transactional strengths that include underlying assets that have current delinquency statuses (91.9% of the pool is current as of the Cut-Off Date) and robust structural features. Additionally, a satisfactory third-party due diligence review was performed on the portfolio with respect to regulatory compliance, payment history, servicing comments and data capture as well as title and tax review. Updated broker price opinions or full appraisals were provided for 100.0% of the pool; however, a reconciliation was not performed on the updated values.

The transaction employs a representations and warranties (R&W) framework that includes certain weakness such as an unrated representation provider (Ajax) and knowledge qualifiers (with clawback). Other mitigating factors include (1) lifetime R&W, (2) significant loan seasoning and clean performance history in recent years, (3) a satisfactory third-party due diligence review, (4) Directing Noteholders can put forth an R&W breach review and (5) R&W-related disputes are ultimately subject to arbitration.

Certain loans may be secured by properties located in counties designated as disaster areas by the Federal Emergency Management Agency (FEMA) as a result of Hurricane Harvey or Hurricane Irma. Additionally, certain loans may be secured by properties located in counties affected by the wildfires in California. Property inspections were conducted on such FEMA loans to determine the extent of the potential damage and if such damage occurred prior to the Closing Date. DBRS reviewed the inspection report and applied a haircut on property values for properties with material damage. In the transaction, at the Closing Date, the Sponsor provides a no-damage/condemnation loan-level representation and warranty. However, as wildfires in California are continuing, certain loans may incur damage after the Closing Date, which the Sponsor is not required to cure or repurchase. As a result, DBRS ran additional scenario analyses to stress certain potentially affected loans and test that the rated bonds can withstand further property value declines.

The DBRS ratings address the timely payments 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 presale report.

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 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 under Related Documents or by contacting us at info@dbrs.com.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.