DBRS Morningstar Finalizes Provisional Ratings on Homeward Opportunities Fund I Trust 2020-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2020-1 (the Certificates) issued by Homeward Opportunities Fund I Trust 2020-1 (HOF I 2020-1 or the Trust):

-- $144.7 million Class A-1 at AAA (sf)
-- $15.7 million Class A-2 at AA (sf)
-- $14.1 million Class A-3 at A (sf)
-- $14.1 million Class M-1 at BBB (sf)
-- $13.2 million Class B-1 at BB (sf)
-- $13.2 million Class B-1A at BB (sf)
-- $13.2 million Class B-1AX at BB (sf)
-- $13.2 million Class B-1B at BB (sf)
-- $13.2 million Class B-1BX at BB (sf)
-- $13.2 million Class B-1C at BB (sf)
-- $13.2 million Class B-1CX at BB (sf)
-- $13.2 million Class B-1D at BB (sf)
-- $13.2 million Class B-1DX at BB (sf)
-- $13.2 million Class B-1E at BB (sf)
-- $13.2 million Class B-1EX at BB (sf)
-- $13.2 million Class B-1F at BB (sf)
-- $13.2 million Class B-1FX at BB (sf)
-- $13.2 million Class B-1G at BB (sf)
-- $13.2 million Class B-1GX at BB (sf)
-- $13.3 million Class B-2 at B (sf)

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

The AAA (sf) rating on the Class A-1 Certificates reflects 36.80% of credit enhancement provided by subordinate Certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 29.95%, 23.80%, 17.65%, 11.90%, and 6.10% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime, expanded prime, and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 492 mortgage loans with a total principal balance of $228,890,726 as of the Cut-Off Date (April 1, 2020).

The originators for the mortgage pool are 5th Street Capital, Inc. (42.8%), Sprout Mortgage Corporation (41.0%), and other originators, each comprising less than 6.0% of the mortgage loans. Specialized Loan Servicing LLC (62.4%), Fay Servicing, LLC (31.4%), and Lima One Capital, LLC (6.2%) will service all loans within the pool.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) and Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the QM/ATR rules, 58.3% of the loans are designated as non-QM. Approximately 41.7% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Homeward Opportunities Fund I LP (HOF I) is the Sponsor and the Servicing Administrator of the transaction. HOF I Asset Selector LLC serves as the Asset Selector for securitizations sponsored by HOF I and, for this transaction, determined which mortgage loans would be included in the pool. The Sponsor, Depositor, Administrator, Asset Selector, and Servicing Administrator are affiliates of the same entity.

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

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest in at least 5% of the Certificates (the Class B-3 and X Certificates) issued by the Trust, 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 three-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 Sponsor will have the option, but not the obligation, to repurchase any mortgage loan (other than loans under the forbearance plan as of the Closing Date) that becomes 90 or more days delinquent or are real estate owned at the repurchase price (par plus interest), provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

Unlike prior HOF non-QM securitizations where the servicers fund advances of delinquent principal and interest (P&I) on loans that become 180 days delinquent, for this transaction, the Servicers will only fund advances for 30 days of delinquent P&I. The Servicers, however, are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties. The one-month advancing mechanism may significantly increase the probability of periodic interest shortfalls in the current economic environment affected by the Coronavirus Disease (COVID-19). As a large number of borrowers seek forbearance on their mortgages in the coming months, P&I collections may be reduced meaningfully.

Also unlike prior HOF non-QM (or traditional non-QM) securitizations that incorporate a pro rata feature among the senior tranches, this transaction employs a sequential-pay cash flow structure across the entire capital stack. 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 and prior period bond writedown amounts first before being allocated to unpaid cap carryover amounts to Class A-1 up to Class B-1.

The coronavirus pandemic and resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may arise in the coming months for many residential mortgage-backed security (RMBS) asset classes—some meaningfully.

The non-QM sector is a traditional RMBS asset class that consists of securitizations backed by pools of residential home loans that may fall outside of the CFPB’s ATR rules, which became effective on January 10, 2014. Non-QM loans encompass the entire credit spectrum. They range from high-FICO, high-income borrowers who opt for interest-only or higher debt-to-income ratio mortgages, to near-prime debtors who have had certain derogatory pay histories but were cured more than two years ago, to nonprime borrowers whose credit events were only recently cleared. In addition, some originators offer alternative documentation or bank statement underwriting to self-employed borrowers in lieu of verifying income with W-2s or tax returns. Finally, foreign nationals and real estate investor programs, while not necessarily non-QM in nature, are often included in non-QM pools.

As a result of the coronavirus, DBRS Morningstar expects increased delinquencies and loans on forbearance plans, slower voluntary prepayment rates, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Implications for Credit Ratings,” published on April 16, 2020), for the non-QM asset class, DBRS Morningstar assumes a combination of higher unemployment rates, lower voluntary prepayment rates, and more conservative home price assumptions than what DBRS Morningstar previously used. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the non-QM asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value ratio (LTV) borrowers may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with prior credit events have exhibited difficulties in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Self-employed borrowers are potentially exposed to more volatile income sources, which could lead to reduced cash flows generated from their businesses. Higher LTV borrowers, with lower equity in their properties, generally have fewer refinance opportunities and therefore slower prepayments. In addition, certain pools with elevated geographic concentrations in densely populated urban metropolitan statistical areas may experience additional stress from extended lockdown periods and the slowdown of the economy.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act, which was signed into law on March 27, 2020, 19.1% of the borrowers are on forbearance plans because of financial hardship related to the coronavirus. These forbearance plans allow temporary payment holidays for three months followed by repayment once the forbearance period ends. For these loans, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower P&I collections and (2) limited servicing advances on delinquent P&I. These assumptions include the following:

(1) Increasing delinquencies to generally two times (x) the forbearance percentage as of the Closing Date for the AAA (sf) and AA (sf) rating levels for the first 12 months,
(2) Increasing delinquencies to generally 1.5x the forbearance percentage as of the Closing Date for the first nine months for the A (sf) and below rating levels, and
(3) Assuming no voluntary prepayments for the first 12 months for the AAA (sf) and AA (sf) rating levels.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentaries: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: Implications for Credit Ratings.”

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition,
-- Satisfactory third-party due diligence review,
-- Improved underwriting standards,
-- Compliance with the ATR rules, and
-- Current loans and faster prepayments.

The transaction also includes the following challenges:

-- Borrowers on forbearance plans,
-- One-month servicer advances of delinquent P&I,
-- Representations and warranties framework,
-- Certain nonprime, non-QM, and investor loans,
-- Servicers’ financial capability, and
-- High loan amounts.

The full description of the strengths, challenges, and mitigating factors is detailed in the related rating report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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