DBRS Morningstar Finalizes Provisional Ratings on Vista Point Securitization Trust 2020-2

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2020-2 (the Certificates) to be issued by Vista Point Securitization Trust 2020-2 (VSTA 2020-2 or the Trust):

-- $151.7 million Class A-1 at AAA (sf)
-- $16.8 million Class A-2 at AA (high) (sf)
-- $24.9 million Class A-3 at A (sf)
-- $11.8 million Class M-1 at BBB (sf)
-- $11.7 million Class B-1 at BB (sf)
-- $10.0 million Class B-2 at B (low) (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 36.25% of credit enhancement provided by subordinate certificates. The AA (high) (sf), A (sf), BBB (sf), BB (sf), and B (low) (sf) ratings reflect 29.20%, 18.75%, 13.80%, 8.90%, and 4.70% 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 516 mortgage loans with a total principal balance of $238,003,315 as of the Cut-Off Date (July 1, 2020).

This is the second securitization by the aggregator Vista Point Mortgage, LLC (Vista Point). Vista Point acquired the mortgage loans from several mortgage originators, including Hometown Equity Mortgage, LLC doing business as (dba) the Lender (the Lender; 44.5%) and other originators each comprising less than 15.0% of the mortgage loans by balance. DBRS Morningstar conducted a review of Vista Point’s residential mortgage platform and believes the company is an acceptable mortgage loan aggregator. DBRS Morningstar did not perform an operational risk review of the originators. However, DBRS Morningstar had a brief high-level conference call with the management team of the Lender, the largest originator by balance, where the team provided an overview of the origination practices. Although new in Non-QM origination, the management team at the Lender has been originating agency and other mortgage loans for over 18 years.

All acquired mortgage loans are underwritten and funded by the originators on a delegated basis pursuant to either Vista Point proprietary guidelines or approved originator underwriting guidelines. The mortgages were acquired pursuant to Vista Point’s PrimePoint (non-investor) and InvestPoint (investor) programs as described in the report.

Although the non-investor mortgage loans were generally originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) 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, 37.8% of the loans are designated as Non-QM. Approximately 62.2% of the loans are made to investors for business purposes including 56.5% of loans underwritten to property-level cash flows (DSCR). The business purpose loans are not subject to the QM/ATR rules.

The pool has a concentrated geographic composition with California representing 67.4% of the pool. In addition, approximately 47.8% by balance are loans backed by properties located in the top three metropolitan statistical areas (MSAs), all of which are in Southern California.

Vista Point is the Sponsor and the Servicing Administrator of the transaction. The Sponsor, Depositor, and Servicing Administrator are affiliates or the same entity.

Specialized Loan Servicing LLC (SLS) will service all loans within the pool.

Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Negative trend by DBRS Morningstar) will act as the Master Servicer. U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will serve as 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 (including the Class B-3 and XS 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 Controlling Holder 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 (optional redemption). The Controlling Holder, as of the Closing Date, will be an affiliate of the Sponsor with at least 50% common ownership with the Sponsor. After such purchase, the Controlling Holder 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.

On any date following the date on which the aggregate stated principal balance of the mortgage loans is less than or equal to 10% of the Cut-Off Date balance, the Servicing Administrator will have the option to terminate the transaction by purchasing all of the mortgage loans and any real-estate owned (REO) property from the issuer at a price equal to the sum of the aggregate stated principal balance of the mortgage loans (other than any REO property) plus accrued interest thereon, the lesser of the fair market value of any REO property and the stated principal balance of the related loan, and any outstanding and unreimbursed advances, accrued and unpaid fees, and expenses that are payable or reimbursable to the transaction parties (optional termination). An optional termination is conducted as a qualified liquidation.

The Servicer will fund advances of delinquent principal and interest (P&I advances) on any mortgage until such loan becomes 90 days delinquent under the Mortgage Bankers Association (MBA) method. The Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred during servicing and disposal of properties. However, the Servicer will not be required to make P&I advances for any mortgage loan under a forbearance plan during the related forbearance period. That said, the Servicer will continue to make P&I advances at the end of the forbearance period to the extent the related mortgagor fails to make required payments then due and remains less than 90 days delinquent.

Of note, if the Servicer defers or capitalizes the repayment of any amounts owed by a borrower in connection with the borrower's loan modification, the Servicer is entitled to reimburse itself from the principal collections for any previously made advances of the capitalized principal amount at the time of such modification.

The Sponsor will also have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days MBA Delinquent or, if a loan is under forbearance plan related to the impact of the Coronavirus Disease (COVID-19), on any date from and after the date on which the loan becomes more than 90 days MBA Delinquent following the end of the forbearance period or any REO property acquired, provided that the aggregate principal balance of such mortgage loans and REO properties repurchased by the Sponsor may not exceed 10.0% of the total loan balance as of the Cut-Off Date.

Unlike the prior transaction by Vista Point (Vista Point Securitization Trust 2020-1), which used a sequential-pay cash flow structure across the entire capital stack (though similar to other previously issued non-QM deals), this transaction incorporates a sequential-pay cash flow structure with a pro rata distribution among the senior tranches subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). After a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 Certificates (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated certificates. Additionally, the excess interest 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 down to Class B-2.

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 arise in the coming months for many residential mortgage-backed securities (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 (IO) or higher debt-to-income (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 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 “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 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 MSAs 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 (CARES) Act, signed into law on March 27, 28 borrowers (approximately 5.7% by balance) either have completed forbearance plans, have been approved for forbearance plans, or are in the process of being reviewed for forbearance plans because the borrowers reported financial hardship related to the coronavirus impact. As of July 28, 2020, 18 borrowers (3.1% of the pool balance) have completed their forbearance plans, having repaid all forborne amounts. Four borrowers (about 1.0% by balance) were offered modifications and received a payment deferral (a total of $23,569 or about 0.01% of the pool balance) due to the previously granted coronavirus-related forbearance plans. Those four borrowers have since declined the deferral modification and are continuing to make their payments. Five borrowers (about 1.1% by balance) have applied for forbearance in April, though they have not submitted the required documentation and made their regular payments. One borrower (about 0.4% by balance) has had the forbearance request approved but elected to make monthly payments through the Cut-Off Date.

SLS, in collaboration with Vista Point, is generally offering borrowers a three-month payment forbearance plan. Beginning in month four, the borrower can repay all or some of the missed mortgage payments at once, deferring the unpaid missed payments, or opt to go on a repayment plan to catch up on missed payments for several, typically six months. During the repayment period, the borrower needs to make regular payments and additional amounts to catch up on the missed payments.

DBRS Morningstar had a conference call with Vista Point regarding its approach to the forbearance loans and understood that Vista Point, in collaboration with the Servicer, developed and recently implemented a review process to evaluate borrowers’ requests for payment relief. As a part of the review, the borrower must submit a completed mortgage assistance application, which includes detailed financial information, income documents, and hardship related documentation. The process helps to ensure borrowers that genuinely need payment relief may receive such relief and those that can make payments but use the payment relief to conserve cash may not. SLS would attempt to contact the borrowers before the expiration of the forbearance period and evaluate the borrowers' capacity to repay the missed amounts. As a result, SLS, in collaboration with Vista Point, may offer a repayment plan or other forms of payment relief, such as deferral of the unpaid principal and interest amounts or a loan modification, in addition to pursuing other loss mitigation options.

For the loans, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower principal and interest collections and (2) limited servicing advances on delinquent P&I. These assumptions include:

1. Increasing delinquencies on the AAA (sf) and AA (high) (sf) rating levels for the first 12 months.
2. Increasing delinquencies on the A (sf) and below rating levels for the first nine months.
3. Assuming no voluntary prepayments for the first 12 months for the AAA (sf) and AA (high) (sf) rating levels.
4. Delaying the receipt of liquidation proceeds during the first 12 months for the AAA (sf) and AA (high) (sf) rating levels.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases: 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, published on 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,
-- Compliance with the ATR rules, and
-- Current loans and faster prepayments.

The transaction also includes the following challenges:

-- The representations and warranties framework,
-- Nonprime, non-QM, and investor loans,
-- Borrowers on forbearance plans,
-- Limited servicing advances of delinquent principal and interest,
-- The servicer’s financial capability, and
-- Limited performance history.

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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