DBRS Morningstar Finalizes Provisional Ratings on Visio 2020-1 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2020-1 (the Notes) issued by Visio 2020-1 Trust (Visio 2020-1):

-- $102.9 million Class A-1 at AAA (sf)
-- $10.2 million Class A-2 at AA (sf)
-- $16.5 million Class A-3 at A (sf)
-- $7.2 million Class M-1 at BBB (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 35.60% of credit enhancement provided by subordinated Notes. The AA (sf), A (sf), and BBB (sf) ratings reflect 29.25%, 18.90%, and 14.40% of credit enhancement, respectively.

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

This securitization is a portfolio of fixed- and adjustable-rate, expanded prime and nonprime first-lien residential mortgages funded by the issuance of the Notes. This transaction marks the sixth securitization from Residential Credit Opportunities II, LLC (the Sponsor) backed entirely by loans originated to investors under debt service coverage ratio (DSCR) programs. The Notes are backed by 813 mortgage loans with a total principal balance of $159,851,845 as of the Cut-Off Date (June 30, 2020).

Visio Financial Services Inc. is the sole originator for the mortgage pool. The servicer of the loans is Servis One, Inc. doing business as BSI Financial Services.

The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and the DSCR, where applicable. Since the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s (CFPB’s) Ability-to-Repay (ATR) rules and TILA/RESPA Integrated Disclosure rule.

Residential Credit Opportunities II, LLC (the Sponsor), directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of the Class B-2, B-3, and XS Notes, representing at least 5% of the Notes, to satisfy the risk-retention requirement in the European Union Securitization Regulation and subsequently, 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 may redeem all outstanding Notes at a price equal to the greater of (A) the sum of outstanding Note amounts plus accrued and unpaid interest as well as unreimbursed advances and fees or (B) the sum of the outstanding balance of the mortgage loans, accrued and unpaid interest, and the fair market value of all real estate owned properties, unreimbursed advances, and fees.

The Sponsor will have the option, but not the obligation, to purchase any mortgage loan that becomes 60 or more days delinquent under the Mortgage Bankers Association (MBA) method at par plus interest, provided that such purchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

The Servicer will not fund advances of delinquent principal and interest (P&I) on any mortgage. 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.

Similar to some nonqualified mortgage (non-QM) deals issued during the pandemic, the transaction employs a sequential-pay cash flow structure. However, as described below, Visio 2020-1 contains certain distinct aspects.

Unique Transaction Features
In contrast to most nonqualified mortgage (non-QM) transactions where interest and principal proceeds have separate waterfalls, Visio 2020-1 employs a cash flow structure that combines both interest and principal proceeds into one available funds waterfall for the DBRS Morningstar-rated classes. Within the priority of payments, interest and principal will first be used to pay interest and then the excess of the related fixed-rate interest amounts over the applicable available funds cap (cap carryover amounts), if any, to the DBRS Morningstar-rated tranches (Classes A-1, A-2, A-3, and M-1), sequentially. Afterward, for the more subordinate classes, interest will be used to pay interest and then cap carryover amounts, and, once the DBRS Morningstar-rated tranches are no longer outstanding, principal can be used to pay interest and then cap carryover amounts, sequentially, as each more senior tranche is paid down. This structure directs more upfront proceeds to the DBRS Morningstar-rated tranches for payment of interest and cap carryover amounts.

In addition, unlike most non-QM securitizations where the servicers fund advances of delinquent principal and interest (P&I) on loans up to 180 days delinquent, for this transaction, the Servicer will not fund any P&I advances. The Servicer, however, is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties. The no advancing mechanism may increase the probability of periodic interest shortfalls in the current economic environment affected by the Coronavirus Disease (COVID-19) pandemic. As a large number of borrowers seek forbearance on their mortgages in the coming months, P&I collections may be reduced meaningfully.

CORONAVIRUS 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 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, 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 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 “Global Macroeconomic Scenarios: July Update,” published on July 22, 2020), for the non-QM asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than what it previously used. Such MVD assumptions are derived through a fundamental home price approach based on the forecast 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 that loans originated to (1) borrowers with recent credit events, (2) self-employed borrowers, or (3) higher loan-to-value (LTV) ratio 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, signed into law on March 27, 8.1% (as of July 13, 2020) of the borrowers are on forbearance plans because of financial hardship related to the coronavirus. These forbearance plans allow partial payment relief for an initial period, followed by repayment once the relief period ends. In order to qualify for a forbearance plan as a result of the pandemic, the Servicer will require the related mortgagor for the related Mortgage Loan to complete a hardship affidavit to certify the hardship is related to the coronavirus. The Servicer, in collaboration with the Depositor, is offering borrowers (who are contractually current prior to applying) three forbearance plan options: (1) a 12-month forbearance plan where the mortgagor pays 75% of its contractual monthly payment for each of the first six months during the plan and 125% of its contractual monthly payment for each of the last six months during the plan, (2) a nine-month forbearance plan where the mortgagor pays 50% of its contractual monthly payment for each of the first three months during the plan and 125% of its contractual monthly payment for each of the last six months during the plan, and (3) a 12-month forbearance plan where the mortgagor pays 25% of its contractual monthly payment for each of the first three months during the plan and 125% of its contractual monthly payment for each of the last nine months during the plan.

For this deal, 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 for the AAA (sf) and AA (sf) rating levels for the first 12 months.
(2) Increasing delinquencies for the A (sf) and below rating levels for the first nine months.
(3) Applying no voluntary prepayments for the AAA (sf) and AA (sf) rating levels for the first 12 months.
(4) Delaying the receipt of liquidation proceeds for the AAA (sf) and AA (sf) rating levels for the first 12 months.

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: July Update,” dated July 22, 2020.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards.
-- Robust loan attributes and pool composition.
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Investor loans.
-- Borrowers on forbearance plans.
-- No servicer advances of delinquent P&I.
-- Representations and warranties framework.

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.

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

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