DBRS Assigns Provisional Ratings to New Residential Mortgage Loan Trust 2019-NQM1

DBRS, Inc. (DBRS) assigned provisional ratings to the Mortgage-Backed Notes, Series 2019-NQM1 (the Notes) issued by New Residential Mortgage Loan Trust 2019-NQM1 (the Trust or the Issuer) as follows:

-- $192.6 million Class A-1 at AAA (sf)
-- $27.8 million Class A-2 at AA (sf)
-- $33.6 million Class A-3 at A (sf)
-- $14.6 million Class M-1 at BBB (sf)
-- $11.2 million Class B-1 at BB (sf)
-- $7.4 million Class B-2 at B (sf)

The AAA (sf) rating on the Notes reflects the 34.60% of credit enhancement provided by subordinated Notes in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 25.15%, 13.75%, 8.80%, 5.00% and 2.50% 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 fixed- and adjustable-rate, prime, expanded prime and non-prime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 532 loans with a total principal balance of $294,491,925 as of the Cut-Off Date (January 1, 2019).

All the loans were originated by New Penn Financial, LLC (New Penn) or by a correspondent and underwritten by New Penn and Shellpoint Mortgage Servicing (SMS) is the Servicer. The mortgages were originated under the following programs:

(1) SmartSelf and SmartSelf Plus (69.9%) — Generally made to self-employed borrowers using bank statements to support self-employed income for qualification purposes.

(2) SmartEdge and SmartEdge Plus (23.3%) — Generally made to borrowers seeking flexible financing options (interest-only (IO) loans or higher debt-to-income ratios (DTI)), who may have a recent credit event (two or more years seasoned) that may preclude prequalification for another program.

(3) SmartVest (5.6%) — Generally made to borrowers who are experienced real estate investors looking to purchase or refinance an investment property that is held for business purposes.

(4) High Balance Extra (0.7%) — Generally made to prime borrowers with loan amounts exceeding the government-sponsored enterprise (GSE) loan limits who may fall outside the Qualified Mortgage (QM) requirements based on documentation and DTI.

(5) SmartTrac (0.3%) — Generally made to borrowers seeking flexible financing options (IO loans or higher DTI) who may have a recent credit event (one to two or more years seasoned) that may preclude prequalification for another program.

(6) Smart Condo (0.2%) — Generally made to prime borrowers seeking flexible financing options for condominium properties that do not meet agency guidelines.

New Residential Investment Corp. is the Sponsor of the transaction. Nationstar Mortgage LLC (Nationstar) will act as the Master Servicer. Citibank, N.A. (rated A (high) with a Positive trend by DBRS), will act as the Paying Agent, Note Registrar and Owner Trustee. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS) will serve as Indenture Trustee. Citicorp Trust Delaware, National Association will serve as the Delaware Trustee. Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS) will serve as Custodian.

Although the mortgage loans were originated to satisfy the 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 various reasons. In accordance with the CFPB QM/ATR rules, 0.2% of the loans are designated as QM Safe Harbor and 77.6% as non-QM. Approximately 22.2% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

The Servicer will generally fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent and they 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 Sponsor intends to retain 5% of the fair value of all the Notes issued by the Issuer (other than the Class R Notes) to satisfy the credit risk retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

The Seller will have the option, but not the obligation, to repurchase any mortgage loan that becomes 60 or more days delinquent under the Mortgage Bankers Association (MBA) method or any real estate-owned (REO) property acquired in respect of a mortgage loan at a price equal to the stated principal balance of such loan, provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-off Date (Optional Repurchase Price).

On or after the earlier of (1) the payment date occurring in January 2021 or (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 of the outstanding mortgage loans, thereby retiring the Notes, at a price equal to the outstanding aggregate stated principal balance of the mortgage loans plus accrued and unpaid interest.

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 Notes as the outstanding senior Notes are paid in full.

The ratings reflect transactional strengths that include the following:

(1) Robust Loan Attributes and Pool Composition: The mortgage loans in this portfolio generally exhibit expanded prime characteristics and robust loan attributes as reflected in credit scores, combined loan-to-value (LTV) ratios, borrower household income and liquid reserves. As the programs move down the credit spectrum, certain characteristics, such as lower LTVs, suggest the consideration of compensating factors for riskier pools. The pool comprises 46.1% fixed-rate mortgages, which have the lowest default risk because of the stability of monthly payments. The pool comprises 53.9% hybrid adjustable-rate mortgages (ARMs) with initial fixed periods of five to ten years, allowing borrowers sufficient time to credit cure before rates reset.

(2) ATR Rules and Appendix Q Compliance: All of the mortgage loans, except for the business-purpose investor loans, were underwritten in accordance with the eight underwriting factors of the ATR rules. In addition, New Penn’s underwriting standards for the SmartEdge, SmartEdge Plus, SmartTrac and SmartCondo programs generally 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, in certain instances, loans were permitted to have deviations from Appendix Q.

(3) 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.

(4) Improved Underwriting Standards: Whether for prime or non-prime mortgages, generally, underwriting standards have improved significantly from the pre-crisis era with respect to certain attributes such as income, asset and employment verification, as well as appraisal and reserve requirements.

-- Full documentation generally consists of two years of W-2s (or two years of personal and business tax returns for self-employed borrowers), two months of asset statements and a verbal or written verification of employment. Borrowers must execute and submit an IRS Form 4506-T, and a tax transcript from the IRS using the executed Form 4506-T is obtained.

-- For loans in the SmartSelf and SmartSelf Plus programs, one borrower must be self-employed and income must be supported by 12 or 24 months of personal or business bank statements.

-- New Penn’s appraisal review process incorporates validation through either a second full appraisal, a desk review or a field review.

-- Minimum reserve and maximum LTV requirements vary based on program, loan amount, credit score and DTI.

The transaction also includes the following challenges and mitigating factors:

(1) Representations and Warranties (R&W) Framework: The R&W framework is considerably weaker than that of a post-crisis prime jumbo 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 Depositor) has the option to perform the review in house or use a third-party reviewer. Finally, the R&W provider (the Seller) is an unrated entity, has limited performance history of expanded 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 Noteholders representing 25% interest in the Notes 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 originator review of New Penn and deems it to be operationally sound.

-- The Sponsor or an affiliate of the Sponsor will retain 5% of each class of Notes (other than the Class R Notes), 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 as well as 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, Non-QM and Investor Loans: Compared with post-crisis prime jumbo transactions, this portfolio contains mortgages originated to borrowers with weaker credit and prior derogatory credit events as well as large concentrations of non-QM and investor loans. DBRS notes the following mitigating factors:

-- All loans, except for the business-purpose investor loans, were originated to meet the eight underwriting factors as required by the ATR rules. Also, certain loans were underwritten to comply with the standards set forth in 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, borrower credit events had generally happened more than two years ago, on average, prior to origination. In its analysis, DBRS applies additional penalties for borrowers with recent credit events within the past two years (two loans, representing <0.1% of the pool).

-- For investor loans, DBRS applies a 1.7 times (x) to 1.8x penalty to default frequency relative to owner-occupied loans, holding other attributes constant, to address the higher default risk associated with investment properties. In addition, DBRS applies further penalties to 63 SmartVest loans, which were underwritten using a property cash flow ratio to qualify borrowers for income. The investor loans in this pool generally have a better credit profile than the overall pool with a weighted-average (WA) current FICO of 751, WA original CLTV of 66.6%, WA DTI of 27.1% and substantial liquid reserves at approximately $204,436.

(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 the liquidation of the mortgages but will increase the possibility of periodic interest shortfalls to the Noteholders. Mitigating factors include that principal proceeds can be used to pay interest shortfalls to the Notes as the outstanding senior Notes are paid in full and 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, SMS, 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 Nationstar as the Master Servicer. If the Servicer fails in its obligation to make advances, Nationstar 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 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 is detailed in the related presale report.

DBRS notes that the above press release was amended on February 11, 2019, to fix a note that incorrectly stated that the rated entities did not participate in the ratings process. The amendment was minor and would not impact the understanding of the reader.

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 & Criteria.

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.

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