DBRS Morningstar Assigns Ratings to Four COLT Transactions

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following Mortgage Pass-Through Certificates from the COLT 2018-2, 2019-1, 2019-2, and 2019-3 Mortgage Loan Trust transactions:

COLT 2018-2
-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AA (high) (sf)
-- Class M-1 at AA (low) (sf)
-- Class B-1 at BBB (high) (sf)
-- Class B-2 at BB (high) (sf)

COLT 2019-1
-- Class A-1 at AAA (sf)
-- Class A-2 at AA (high) (sf)
-- Class A-3 at A (high) (sf)
-- Class M-1 at BBB (sf)
-- Class B-1 at BB (high) (sf)
-- Class B-2 at B (high) (sf)

COLT 2019-2
-- Class A-1 at AAA (sf)
-- Class A-2 at AA (high) (sf)
-- Class A-3 at AA (low) (sf)
-- Class M-1 at A (low) (sf)
-- Class B-1 at BBB (sf)
-- Class B-2 at B (high) (sf)

COLT 2019-3
-- Class A-1 at AAA (sf)
-- Class A-2 at AA (high) (sf)
-- Class A-3 at A (high) (sf)
-- Class M-1 at BBB (high) (sf)
-- Class B-1 at BB (high) (sf)
-- Class B-2 at BB (sf)

The above-referenced securities are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these securities Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about January 2, 2020. In accordance with MCR’s engagement letter covering these securities, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at https://ratingagency.morningstar.com/mcr.

These four COLT transactions are generally classified as non-qualified mortgage (non-QM) transactions.

DBRS Morningstar performed the following rating analysis on the transactions:
-- Loan-level default probability, loss severity, and expected loss review;
-- Cash flow analysis incorporating prepayment, loss timing, and interest rate assumptions, to evaluate the form and sufficiency of available credit enhancement;
-- Third-party due diligence sample size review;
-- Representations and warranties framework review; and
-- Historical performance analysis as reflected in delinquencies, cumulative losses, and constant prepayment rates.

POOL EXPECTED LOSSES
DBRS Morningstar used its proprietary RMBS Insight 1.3 model to derive probability of defaults, loss severities, and expected losses for each of the transactions. DBRS Morningstar recalculated or remapped certain collateral attributes in its analysis. Such recalculations and remapping in the transactions were applied in a consistent manner to how DBRS Morningstar would analyze similar RMBS transactions. The probability of defaults, loss severities, and expected losses for each transaction are generally stepped up from the raw model results.

CASH FLOW ANALYSIS
A structural analysis that encompassed 12 cash flow stress scenarios was performed, which focused on prepayment speeds, timing of losses, and interest rate stresses. For transactions where the servicer funds advances of delinquent principal and interest on any mortgage for a limited period, DBRS Morningstar approximated delinquency curves by front-loading its standard seasoned loss timing vectors and assumes that the servicer will only advance for delinquent mortgages up to that period. This results in principal and interest collections being shut off as soon as loans reach certain months of delinquency until they are liquidated. Additionally, weighted-average coupon deterioration stresses were incorporated in the cash flow scenarios.

OPERATIONAL RISK REVIEW
DBRS Morningstar performed operational risk reviews on many non-QM originators and the servicers. For the purpose of assigning ratings to the transactions, DBRS Morningstar did not perform additional operational risk reviews. DBRS Morningstar notes the following reasons and mitigating factors:
-- If an originator consisted of less than 15% of a securitized pool, an operational risk review is generally not warranted in accordance with DBRS Morningstar’s RMBS rating methodology.
-- MCR, when assigning ratings to a non-QM transaction on or prior to the closing date, generally conducted operational risk reviews, at the aggregator or originator level, for such securitization.
-- If a DBRS Morningstar originator review was not performed for a transaction, DBRS Morningstar evaluated the actual historical performance of the securitization and deemed the performance satisfactory.
-- Notwithstanding the above, DBRS Morningstar adjusted the originator scores to zero. Lower originator scores resulted in increased loss assumptions.

THIRD-PARTY DUE DILIGENCE
DBRS Morningstar reviewed the sample size for each of the due diligence review categories, including credit, regulatory compliance, valuation, data integrity, pay histories, servicing comments, and tax and title, when applicable. The sample sizes in the transactions meet DBRS Morningstar’s due diligence criteria. DBRS Morningstar did not review the loan-level due diligence findings for each of the transactions, rather it relied on the analysis done by MCR at the time of assigning ratings to these transactions on or prior to the closing dates, as well as the satisfactory performance of the transactions to date.

REPRESENTATIONS AND WARRANTIES FRAMEWORK
DBRS Morningstar conducted a review of the representations and warranties (R&W) framework for the transactions. The review covers key considerations, such as R&W provider, controlling holder, enforcement mechanism, breach reviewer, remedy, and dispute resolution. For non-QM securitizations, DBRS Morningstar generally adjusted the originator scores downward for the mortgage pools because of certain perceived weaknesses in the R&W framework in such transactions. Such adjustments resulted in increased default and expected loss assumptions. DBRS Morningstar reviewed the various aspects of the R&W framework in conjunction with a detailed analysis of (1) the quality of the underlying mortgage loans and (2) third-party due diligence sample size and deemed the R&W standard for the transactions acceptable.

HISTORICAL PERFORMANCE
DBRS Morningstar reviewed historical performance for each of the transactions, as reflected in delinquencies, cumulative losses, and constant prepayment rates (CPR). Generally serious delinquency rates in non-QM transactions have ramped up higher and faster than their post-crisis prime jumbo counterparts given the nature of the such borrowers and their credit profiles.

Based on the short loan seasoning and a mostly benign housing cycle, non-QM transactions have in general shown minimal, if any, losses to date. If the economic environment becomes more distressed, some of the non-QM borrowers, particularly those with prior credit events, may come under pressure, although DBRS Morningstar generally believes that non-QM securitizations are sufficiently credit enhanced to withstand the expected losses at various stress levels. Voluntary prepayments have been higher than anticipated across all non-QM shelves, as these borrowers either credit cure or refinance in the current low interest rate environment.

OTHER REVIEWS
DBRS Morningstar notes that a legal analysis, which included but was not limited to legal opinions and various transaction documents, was performed by MCR as part of its process of assigning new ratings to each transaction on or prior to the closing date. For the purpose of assigning new ratings to the transactions, DBRS Morningstar did not perform additional document reviews unless otherwise indicated in this press release.

SUMMARY
The ratings are a result of DBRS Morningstar’s application of the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” published in June 2019, unless otherwise indicated in this press release.

DBRS Morningstar’s ratings in the highest and second-highest rating categories 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. For all other ratings, DBRS Morningstar’s ratings 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 ratings assigned to the classes specified above are initiated by DBRS Morningstar as part of the recently announced analytical integration for certain overlapping U.S RMBS asset classes (see the August 30, 2019, press release, "DBRS and Morningstar Credit Ratings Confirm U.S. RMBS Asset Class Coverage"). As such, the ratings specified above are deemed to be solicited DBRS Morningstar ratings.

The ratings assigned to certain securities may differ from the ratings implied by the quantitative model, but no such difference constitutes a material deviation. When assigning the ratings, DBRS Morningstar takes into account the rating analysis detailed in this press release and may have made qualitative adjustments for the analytical considerations not fully captured by the quantitative model.

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 Morningstar 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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