DBRS Finalizes Provisional Ratings on OBX 2018-EXP2 Trust

DBRS, Inc. (DBRS) finalized the following provisional ratings on the Mortgage-Backed Notes, Series 2018-EXP2 (the Notes) issued by OBX 2018-EXP2 Trust (the Trust):

-- $134.8 million Class 1-A-1 at AAA (sf)
-- $33.7 million Class 1-A-2 at AAA (sf)
-- $168.4 million Class 1-A-3 at AAA (sf)
-- $4.3 million Class 1-A-4 at AAA (sf)
-- $172.7 million Class 1-A-5 at AAA (sf)
-- $134.8 million Class 1-A-IO1 at AAA (sf)
-- $33.7 million Class 1-A-IO2 at AAA (sf)
-- $168.4 million Class 1-A-IO3 at AAA (sf)
-- $4.3 million Class 1-A-IO4 at AAA (sf)
-- $172.7 million Class 1-A-IO5 at AAA (sf)
-- $172.7 million Class 1-A-IO6 at AAA (sf)
-- $134.8 million Class 1-A-6 at AAA (sf)
-- $33.7 million Class 1-A-7 at AAA (sf)
-- $168.4 million Class 1-A-8 at AAA (sf)
-- $4.3 million Class 1-A-9 at AAA (sf)
-- $172.7 million Class 1-A-10 at AAA (sf)
-- $126.4 million Class 2-A-1A at AAA (sf)
-- $31.6 million Class 2-A-1B at AAA (sf)
-- $158.0 million Class 2-A-1 at AAA (sf)
-- $4.0 million Class 2-A-2 at AAA (sf)
-- $162.0 million Class 2-A-3 at AAA (sf)
-- $162.0 million Class 2-A-IO at AAA (sf)
-- $1.3 million Class B-1 at AA (sf)
-- $1.3 million Class B1-IO at AA (sf)
-- $1.3 million Class B1-A at AA (sf)
-- $23.0 million Class B-2 at A (sf)
-- $23.0 million Class B2-IO at A (sf)
-- $23.0 million Class B2-A at A (sf)
-- $10.6 million Class B-3 at BBB (sf)
-- $6.3 million Class B-4 at BB (sf)
-- $3.3 million Class B-5 at B (sf)

Classes 1-A-IO1, 1-A-IO2, 1-A-IO3, 1-A-IO4, 1-A-IO5, 1-A-IO6, 2-A-IO, B1-IO and B2-IO are interest-only (IO) notes. The class balances represent notional amounts.

Classes 1-A-3, 1-A-5, 1-A-IO3, 1-A-IO5, 1-A-6, 1-A-7. 1-A-8, 1-A-9, 1-A-10, 2-A-1, 2-A-3, B1-A and B2-A are exchangeable notes. These classes can be exchanged for combinations of initial exchangeable notes as specified in the offering documents.

The AAA (sf) ratings on the Notes reflect the 12.85% of credit enhancement provided by subordinated Notes in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 12.50%, 6.50%, 3.75%, 2.10% and 1.25% 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 expanded prime first-lien residential mortgages, which is funded by the issuance of mortgage-backed notes. The Notes are backed by 603 loans with a total principal balance of $384,027,255 as of the Cut-Off Date (October 1, 2018).

The Seller, Onslow Bay Financial LLC (OBF), acquired the loans directly from certain select originators or third-party aggregators. The loans were acquired based on agreed-upon underwriting guidelines or carveouts of underwriting guidelines that fit certain desired documentation requirements or credit characteristics. This is the second expanded prime transaction issued by the Seller.

While certain loan attributes are comparable to those in post-crisis prime transactions, the loans in this transaction fall into the expanded prime category and may have IO features, higher debt-to-income and loan-to-value ratios, lower credit scores and barbelled distribution of certain characteristics as compared with recent prime securitizations.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ability-to-repay 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. In accordance with the CFPB Qualified Mortgage (QM) rules, 13.1% of the loans are designated as QM Safe Harbor, 1.9% as QM Rebuttable Presumption and 54.5% as non-QM. Approximately 30.5% of the loans are investor loans and are not subject to the QM rules.

As of the Cut-Off Date, 47.6% of the pool is serviced by Specialized Loan Servicing LLC, 42.4% by Select Portfolio Servicing, Inc. and 10.0% by Quicken Loans, Inc. Wells Fargo Bank, N.A. (Wells Fargo; rated AA, Stable by DBRS) will act as the Master Servicer, Paying Agent and Custodian. OBF will act as the Principal & Interest (P&I) Advancing Party. Wilmington Savings Fund Society, FSB, will serve as Trustee.

Advances of delinquent P&I will be made on any loan until such loan becomes 120 days delinquent to the extent such advances are determined to be recoverable. The servicers are 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 is enhanced from a pre-crisis structure.

Third-party due diligence was conducted on all the loans in the pool. Credit and compliance reviews were performed on all the loans, and property valuation reviews were performed on all but one loan in the pool. Data integrity checks were also performed on the pool. For certain seasoned loans, additional third-party due diligence was performed with respect to tax, title and lien, servicing comments and pay histories.

The Seller will be making representations and warranties (R&Ws) for the life of the transaction. For loans designated as seasoned mortgage loans (loans originated on or prior to July 1, 2016), certain R&Ws will be inapplicable. The Seller intends to retain 5% of the fair value of all the Notes issued by the Issuer (other than the Class R Notes) and the trust certificate to satisfy the credit risk retention requirements.

STRENGTHS
-- Robust Pool Composition
-- Satisfactory Underwriting Standards
-- Third-Party Due Diligence Review
-- Structural Enhancements

CHALLENGES
-- Non-QM and Investor loans
-- R&W Framework
-- Geographic Concentration
-- Limited Servicing Advances

The full description of the strengths, challenges and mitigating factors is detailed in the related report.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.