DBRS Morningstar Assigns Ratings to CTDL 2020-1 Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following Mortgage Pass-Through Certificates, Series 2020-1 (the Certificates) issued by CTDL 2020-1 Trust (the Trust):

-- $41.5 million Class A-1 at A (sf)
-- $2.6 million Class B-1 at BBB (sf)

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

The A (sf) rating on Class A-1 reflects 19.10% of credit enhancement provided by subordinated Certificates. The BBB (sf) rating on Class B-2 reflects 14.12% of overcollateralization.

This securitization is a portfolio of fixed- and adjustable-rate nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 105 mortgage loans with a total principal balance of $51,310,158 as of the Cut-Off Date (April 30, 2020).

The originators for the mortgage pool are Citadel Servicing Corporation (CSC or the Servicer; 96.8%) and other originators, each comprising less than 3.0% of the mortgage loans. CSC is the servicer for all loans in this pool.

CSC has four programs under which it originates loans. The Non-Prime and Maggi Plus products are CSC’s core mortgage programs with Maggi Plus aimed at higher credit profiles. CSC’s Outside Dodd-Frank and Outside Dodd-Frank Plus products include loans exempt from the Consumer Financial Protection Bureau’s (CFPB) rules. Within each program, the mortgages in this transaction were generally originated using the following documentation requirements:

-- Bank Statement: Generally made to self-employed borrowers using bank statements to support self-employed income for qualification purposes.
-- Full Documentation: Generally made to 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.
-- Debt Service Coverage Ratio: Utilizes rental income generated by the subject property for qualification purposes. Specifically designed to accommodate mortgage loans used to acquire investment properties.
-- Business Purpose: Generally made to borrowers to purchase an investment property or a cash-out refinance where the funds are used for a business purpose and are underwritten using the borrower’s income.
-- Asset Utilization: Generally made to borrowers with significant assets that are enough to cover the cost of the mortgage.
-- Foreign Nationals: Generally made to borrowers who are not authorized to live or work in the U.S., but may visit periodically for vacation or business and wish to purchase property for investment or personal use.

Although the applicable mortgage loans were originated to satisfy the CFPB’s 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, 80.3% of the loans are designated as non-QM. Approximately 19.7% of the loans are made to investors for business purposes or foreign nationals, which are not subject to the QM/ATR rules.

CSC is the sponsor in this transaction. CSC as the sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of the Class XS Certificates representing at least 5% of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

Citadel Depositor, LLC serves as the depositor in this transaction. On or after the earlier of (1) the distribution date in May 2022 or (2) the date when the aggregate unpaid principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Depositor, at its option, may redeem all outstanding Certificates at a price equal to the class balances of the related Certificates plus accrued and unpaid interest, including any Cap Carryover Amounts. After such purchase, the Depositor must 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.

Different from most non-QM transactions, the Servicer will not fund advances of delinquent principal and interest (P&I) on any mortgage; however, the Servicer is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties.

This transaction employs a sequential-pay cash flow structure across the entire capital stack. Principal proceeds can be used to cover interest shortfalls on Class B-1 once Class A-1 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.

Coronavirus Disease (COVID-19) Impact
The coronavirus pandemic and the 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 continue to rise 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 the CFPB’s ATR rules, which became effective on January 10, 2014. Non-QM loans encompass the entire credit spectrum and range from high-FICO, high-income borrowers who opt for interest-only (IO) or higher DTI 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, among others. 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, loans on forbearance plans, and a potential near-term decline in the values of 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 the moderate scenario in its commentary, “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories for the non-QM asset class than it previously used. DBRS Morningstar derived such MVD assumptions through a fundamental home price approach based on the forecasted unemployment rates and GDP growth outlined in the aforementioned moderate scenario. 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.

As permitted by the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020, one mortgage loan in this transaction (2.3% of the aggregate pool balance as of May 21, 2020) is on forbearance plan because of financial hardship related to coronavirus. The forbearance plan allows temporary payment holidays, followed by repayment once the forbearance period ends. The Servicer, in collaboration with the Sponsor, is generally offering borrowers a three-month payment forbearance plan. Beginning in month four, the borrower can repay all of the missed mortgage payments at once or opt for other loss mitigation options. Prior to the end of the applicable forbearance period, the Servicer will contact each related borrower to identify the options available to address related forborne payment amounts. As a result, the Servicer, in conjunction with or at the direction of the Sponsor, may offer a repayment plan or other forms of payment relief, such as deferral of the unpaid P&I amounts or a loan modification, in addition to pursuing other loss mitigation options.

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:
(1) Increasing delinquencies on the A (sf) and below rating levels for the first nine months,
(2) Assuming no voluntary prepayments for the first 12 months for all rating levels.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: “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: June Update,” dated June 1, 2020.

The ratings reflect transactional strengths that include the following:

-- Low LTV ratios,
-- Satisfactory third-party due diligence review,
-- Current loans,
-- Robust pool composition,
-- Improved underwriting standards, and
-- Compliance with the ATR rules.

The transaction also includes the following challenges:

-- Small pool with certain high balance loans,
-- Weaker documentation types,
-- Borrowers on forbearance plans,
-- No servicer advances of delinquent P&I,
-- Representations and warranties framework,
-- Foreign nationals with no FICO score,
-- Nonprime, non-QM, and investor loans, and
-- No master servicer.

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