DBRS Finalizes Provisional Ratings on Mill City Mortgage Loan Trust 2018-4

DBRS, Inc. (DBRS) finalized its provisional ratings on the Mortgage Backed Securities, Series 2018-4 (the Notes) issued by Mill City Mortgage Loan Trust 2018-4 (the Trust) as follows:

-- $60.7 million Class A1A at AAA (sf)
-- $317.1 million Class A1B at AAA (sf)
-- $377.9 million Class A1 at AAA (sf)
-- $410.8 million Class A2 at AA (sf)
-- $450.3 million Class A3 at A (sf)
-- $485.8 million Class A4 at BBB (sf)
-- $33.0 million Class M1 at AA (sf)
-- $39.5 million Class M2 at A (sf)
-- $35.5 million Class M3 at BBB (sf)
-- $41.7 million Class B1 at BB (low) (sf)
-- $36.7 million Class B2 at B (low) (sf)

Classes A1, 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) ratings on the Notes reflect 39.80% of credit enhancement provided by subordinated notes in the pool. The AA (sf), A (sf), BBB (sf), BB (low) (sf) and B (low) (sf) ratings reflect 34.55%, 28.25%, 22.60%, 15.95% and 10.10% 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 funded by the issuance of the Notes. The Notes are backed by 3,214 loans with a total principal balance of approximately $627,658,650 as of the Cut-Off Date (October 31, 2018).

The loans are approximately 132 months seasoned. As of the Cut-Off Date, 90.7% of the pool is current, 4.4% is 30 days delinquent, 1.0% is 60 days to 89 days delinquent and 0.5% is 90+ days delinquent under the Mortgage Bankers Association delinquency method; 3.3% are in bankruptcy. Approximately 35.1% of the pool has been zero times 30 (0 x 30) days delinquent for the past 24 months, 61.2% has been 0 x 30 for the past 12 months and 75.0% has been 0 x 30 for the past six months.

Modified loans comprise 78.5% of the portfolio. The modifications happened more than two years from the Cut-Off Date for 71.4% of the modified loans. Within the pool, 1,310 loans have non-interest-bearing deferred amounts, which equates to 10.1% of the total principal balance. In accordance with the Consumer Financial Protection Bureau Qualified Mortgage (QM) rules, 7.1% of the loans are designated as QM Safe Harbor, 0.1% as QM Rebuttable Presumption and 0.9% as Non-QM. Approximately 91.8% of the loans are not subject to the QM rules.

Approximately 4.7% of the pool comprises non-first-lien loans.

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 are being held in one or more trusts that acquired the mortgage loans between May 2012 and September 2018. 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, through a majority-owned affiliate, 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 Shellpoint Mortgage Servicing (81.8%); Fay Servicing, LLC (15.4%); and Select Portfolio Servicing, Inc. (2.9%).

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.

A satisfactory third-party due diligence review was performed on the portfolio with respect to regulatory compliance, payment history and data capture as well as a title and lien review. Updated broker price opinions or exterior appraisals were provided for all but 21 loans in 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, (2) a comprehensive due diligence review and (3) a representations and warranties enforcement mechanism, including a loss 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 (low) (sf) and B (low) (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.

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.