DBRS Finalizes Provisional Ratings on Homeward Opportunities Fund I Trust 2019-1

DBRS, Inc. (DBRS) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2019-1 (the Certificates) issued by Homeward Opportunities Fund I Trust 2019-1 (HOF I 2019-1 or the Trust):

-- $348.5 million Class A-1 at AAA (sf)
-- $35.6 million Class A-2 at AA (sf)
-- $61.3 million Class A-3 at A (sf)
-- $32.4 million Class M-1 at BBB (sf)
-- $24.4 million Class B-1 at BB (sf)
-- $15.3 million Class B-2 at B (sf)

Other than the specified classes above, DBRS does not rate any other classes in this transaction.

The AAA (sf) rating on the Class A-1 Certificates reflects 34.90% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 28.25%, 16.80%, 10.75%, 6.20% and 3.35% of credit enhancement, respectively.

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 Certificates. The Certificates are backed by participation interests in 1,045 underlying mortgage loans with a total principal balance of $535,388,065 as of the Cut-Off Date (March 1, 2019).

The originators for the underlying mortgage pool are Sprout Mortgage Corporation (Sprout; 74.6%), 5th Street Capital, Inc. (14.9%) and various other originators, each comprising less than 10.0% of the mortgage loans. The Underlying Servicer of the loans is Specialized Loan Servicing LLC (SLS).

The Sprout mortgages were originated under the following programs:

(1) Income per Bank Statements (43.9%) — Generally made to self-employed borrowers using bank statements to support self-employed income for qualification purposes.

(2) Jumbo Special Feature (15.0%) — 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 debt-to-income (DTI) or loans that have special features that do not meet GSE guidelines.

(3) Investor Debt Service Coverage (10.2%) — Generally made to borrowers seeking business-purpose loans for investment properties.

(4) Asset Depletion (5.5%) — Generally made to borrowers with significant assets equal to 110% or more of the original mortgage balance.

For the other originators, the mortgage loans were originated through similar programs.

Homeward Opportunities Fund I LP (HOF I) is the Sponsor and the Servicing Administrator of the transaction. Neuberger Berman Investment Advisers LLC (Neuberger Berman) will act as the Investment Manager and Administrator of the Legal Title Trust and each Underlying Trust. HOF I Asset Selector LLC serves as the Asset Selector for securitizations sponsored by HOF I and, for this transaction, determined which underlying mortgage loans would be included in the pool. The Sponsor, Depositor, Administrator, Investment Manager, Asset Selector and Servicing Administrator are affiliates or the same entity.

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

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s 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 QM/ATR rules, 0.5% of the loans are designated as QM Rebuttable and 76.0% as non-QM. Approximately 23.5% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

The underlying mortgage loans are the assets of the Legal Title Trust. Pursuant to a master participation agreement and participation supplement, the Legal Title Trust granted participation interests in the underlying mortgage loans to the Underlying Grantor Trust and the Underlying REMIC Trusts in exchange for the beneficial interest certificates issued by the Underlying Grantor Trust and the Underlying REMIC Trusts (Underlying Certificates). On the Closing Date, the Underlying Certificates will be conveyed to the Trustee and constitute the assets of the Issuing Entity. Distributions made on the Underlying Certificates will constitute the source of distributions on the Certificates.

The Underlying Servicer will fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent. The Underlying Servicer is also 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, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest in at least 5% of the Certificates issued by the Issuer (other than the Class R Certificates) to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On or after the earlier of (1) the two-year anniversary of the Closing Date 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 outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts.

After such purchase, the Depositor then has the option to complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

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. Furthermore, excess spread can be used to cover realized losses first before being allocated to unpaid cap carryover amounts up to Class B-1.

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 loans move down the credit spectrum in terms of documentation and occupancy, certain
characteristics, such as lower LTVs, higher income and/or more significant reserves, suggest the consideration of compensating factors for riskier pools.
-- The pool comprises 22.1% fixed-rate mortgages, which have the lowest default risk because of the stability of monthly payments, and 77.9% hybrid adjustable-rate mortgages with initial fixed periods of five to ten years, allowing borrowers sufficient time to credit cure before rates reset.

(2) Satisfactory Third-Party Due Diligence Review: Third-party due diligence firms conducted property valuation and credit reviews on 100% of the loans in the pool and compliance reviews on all applicable loans. Data integrity checks were also performed on the pool.

(3) Improved Underwriting Standards: Whether for prime or non-prime mortgages, underwriting standards in general 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 one to 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 verification of employment. Borrowers must execute and submit an IRS Form 4506-T.
-- For borrowers using bank statements as income, generally, one borrower must be self-employed, and income must be supported by 12 months or 24 months of personal or business bank statements.
-- The appraisal review process incorporates validation through a desk review. In addition, for larger loan amounts, second full appraisals are required.
-- Minimum reserves, maximum LTV and maximum DTI requirements are in place and may vary based on certain characteristics, including documentation type, loan amount, credit score and interest-only flag.

(4) Compliance with the ATR Rules: 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.

The transaction also includes the following challenges and mitigating factors:

(1) Representations and Warranties (R&W) Framework: The R&W framework is substantially weaker than 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) has the option to perform the review in house or use a third-party reviewer. Finally, the R&W provider (the Sponsor) is a fund with a finite life, which essentially creates a sunset on the R&W. DBRS notes the following mitigating factors:
-- The Certificateholders representing 25% interest in the Certificates may direct the Trustee to commence a separate review of the related mortgage loan to the extent that they disagree with the Controlling Holder’s determination of a breach or if the Controlling Holder elects not to review a loan that incurred a realized loss.
-- 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 aggregator review on Neuberger Berman and an originator review of Sprout and deems both to be acceptable.
-- The Sponsor or an affiliate of the Sponsor will retain a 5% horizontal residual interest in the Certificates, aligning Sponsor and investor interest in the capital structure.
-- Notwithstanding the above, DBRS adjusted the originator scores downward to account for 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) Certain Non-Prime, Non-QM and Investor Loans: Compared with post-crisis prime 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.
-- Underwriting standards have improved substantially since the pre-crisis era.
-- The 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 report.
-- For loans in this portfolio, borrower credit events (8.1% of the pool) generally happened more than two years prior to origination. In its analysis, DBRS applies additional penalties for borrowers with recent credit events within the past two years (0.6% 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 the Investor Debt Service Coverage loans (17.2% of the pool), which were underwritten using property cash flow/rental income 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 723 and WA original combined LTV of 66.8%. In addition, for investment property loans underwritten using borrower income, which comprise 6.3% of the pool, the WA DTI is 26.8%.

(3) Servicer Advances of Delinquent Principal and Interest: The Underlying Servicer will advance scheduled principal and interest on delinquent mortgages until such loans become 180 days delinquent or until such advances are deemed unrecoverable. 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 Certificateholders. Mitigating factors include the fact that (a) principal proceeds can be used to pay interest shortfalls to the Certificates as the outstanding senior Certificates are paid in full and (b) subordination levels are greater than expected losses, which may provide for payment of interest to the Certificates. 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 report.

(4) Servicer’s Financial Capability: In this transaction, as the Underlying Servicer, SLS is responsible for funding advances to the extent required. The Underlying 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 Underlying 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), 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 Certificates.

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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