DBRS Assigns Provisional Ratings to COLT 2018-4 Mortgage Loan Trust

DBRS, Inc. (DBRS) assigned provisional ratings to the COLT 2018-4 Mortgage Pass-Through Certificates, Series 2018-4 (the Certificates) to be issued by COLT 2018-4 Mortgage Loan Trust (the Trust) as follows:

-- $243.0 million Class A-1 at AAA (sf)
-- $34.4 million Class A-2 at AA (sf)
-- $26.1 million Class A-3 at A (sf)
-- $18.1 million Class M-1 at BBB (sf)
-- $3.0 million Class M-2 at BBB (low) (sf)
-- $10.3 million Class B-1 at BB (sf)
-- $5.0 million Class B-2 at B (high) (sf)

The AAA (sf) rating on the Certificates reflects the 31.45% of credit enhancement (CE) provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BBB (low) (sf), BB (sf) and B (high) (sf) ratings reflect 21.75%, 14.40%, 9.30%, 8.45%, 5.55% and 4.14% of CE, 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 621 loans with a total principal balance of $354,493,121 as of the Cut-Off Date (November 1, 2018).

Caliber Home Loans, Inc. (Caliber) is the Originator and Servicer for 100.0% of the portfolio. The Caliber mortgages were originated under the following five programs:

(1) Elite Access (42.0%) – Generally made to borrowers with strong credit history seeking loans with non-conforming balances who do not meet strict prime jumbo guidelines for various reasons. These loans may have interest-only (IO) features, higher debt-to-income (DTI) and loan-to-value (LTV) ratios or lower credit scores compared with those in traditional prime jumbo securitizations. This program has higher minimum FICO requirements than Premier Access and does not allow for mortgage lates in the past 12 months.

(2) Premier Access (35.4%) – Generally made to borrowers with unblemished credit. These loans may have IO features, higher DTI and LTV ratios or lower credit scores compared with those in traditional prime jumbo securitizations.

(3) Homeowner’s Access (13.0%) – 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.

(4) Fresh Start (8.5%) – Generally made to borrowers with lower credit and borrowers who may have had significant recent credit events within the past 24 months.

(5) Investor (1.2%) – 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.

Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Stable trend by DBRS) will act as the Master Servicer, Securities Administrator and Certificate Registrar. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS) will serve as Trustee.

Although the mortgage loans were originated to satisfy 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 the various reasons described above. In accordance with the CFPB Qualified Mortgage (QM) rules, 29.9% of the loans are designated as QM Safe Harbor, 13.0% as QM Rebuttable Presumption and 55.9% as Non-QM. Approximately 1.2% of the loans are made to investors for business purposes and are not subject to the QM rules.

The Servicer will generally fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent, and it is 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 30% of the Cut-Off Date balance, the Depositor has the option to purchase all outstanding Certificates at a price equal to the outstanding class balance, plus accrued and unpaid interest, including any cap carry-over 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 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. However, 180 loans were permitted to have non-material deviations from Appendix Q.

(2) Strong underwriting standards: 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-2 forms or tax returns), employment and assets. Generally, fully executed 4506-Ts are obtained and tax returns are verified with Internal Revenue Service transcripts if applicable.

(3) Robust loan attributes and pool composition:

-- Although the weighted-average combined LTV ratio has increased from prior transactions, the mortgage loans in this portfolio generally have robust loan attributes as reflected in the 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 LTV or DTI ratios, suggest the consideration of compensating factors for riskier pools.
-- The pool comprises 68.8% fixed-rate mortgages, which have the lowest default risk because of the stability of monthly payments. The pool comprises 31.2% hybrid adjustable-rate mortgages with an initial fixed period of five to seven years, allowing borrowers sufficient time to credit cure before rates reset.

(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 similar loans in Q4 2014. Since the first transaction issued in August 2015, the COLT shelf’s historical performance has been satisfactory, though short. For the previous COLT Non-QM transactions rated by DBRS, as of October 2018, 60+ day delinquency rates ranged from 0.3% to 5.1% and cumulative losses are no higher than 0.01%. Additionally, one of the unrated transactions (COLT 2015-1) exhibited a higher 60+ day delinquency rate of 7.3%. Finally, voluntary prepayment rates have been relatively high, as these borrowers tend to credit cure and refinance into lower-rate mortgages. For details on the COLT securitization performance, please refer to the “Historical Performance” section of the related presale report.

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 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 TILA-RESPA Integrated Disclosure 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 provider (the Originator) is an unrated entity; has 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 an on-site originator (and servicer) review of Caliber and deems it to be acceptable.
-- The Sponsor or an affiliate of the Sponsor will retain certain classes of 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 score downward to account for the potential inability to fulfill repurchase obligations, the lack of performance history and 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: Compared with post-crisis prime 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 and were also generally underwritten to comply with the standards set forth in Appendix Q, although certain loans may have non-material exceptions with respect to Appendix Q.
-- Underwriting standards have improved substantially since the pre-crisis era.
-- 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 related presale report.
-- For loans in this portfolio that were originated through the Homeowner’s Access and Fresh Start programs, certain borrowers had recent prior credit events. Such credit events generally happened, on a non-zero average basis, 34 months (Homeowner’s Access) and 20 months (Fresh Start) 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 Servicer 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 liquidation of the mortgages but will increase the possibility of periodic interest shortfalls to the Certificateholders. Mitigating factors include the following: (a) Principal proceeds can be used to pay interest shortfalls to the Certificates as the outstanding senior Certificates are paid in full and (b) 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 presale report.

(4) Servicer’s financial capability: In this transaction, Caliber, as the Servicer, is responsible for funding advances to the extent required. The Servicer is an unrated entity and may face financial difficulties in fulfilling its servicing advance obligations in the future. Consequently, the transaction employs Wells Fargo as the Master Servicer. If the 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), BBB (low) (sf), BB (sf) and B (high) (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 presale report.

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.