DBRS Morningstar Finalizes Provisional Ratings on BRAVO Residential Funding Trust 2020-NQM1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Notes, Series 2020-NQM1 (the Notes) to be issued by BRAVO Residential Funding Trust 2020-NQM1 (BRAVO 2020-NQM1 or the Trust):

-- $254.7 million Class A-1 at AAA (sf)
-- $25.8 million Class A-2 at AA (sf)
-- $23.4 million Class A-3 at A (sf)
-- $18.5 million Class M-1 at BBB (sf)
-- $12.3 million Class B-1 at BB (sf)
-- $9.1 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 30.35% of credit enhancement provided by subordinate certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 23.30%, 16.90%, 11.85%, 8.50%, and 6.00% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime and nonprime first-lien residential mortgages funded by the issuance of the Mortgage-Backed Notes, Series 2020-NQM1 (the Notes). The Notes are backed by 806 loans with a total principal balance of $365,741,885 as of the Cut-Off Date (June 30, 2020). A portion of the loans in this pool was included in the COLT 2017-2 Mortgage Loan Trust (COLT 2017-2) and COLT 2018-1 Mortgage Loan Trust (COLT 2018-1), which were collapsed and cleaned up previously. The remaining loans were acquired by affiliates of the sponsor.

The mortgage loans were originated by First Guaranty Mortgage Corporation (FGMC; 39.1%), Caliber Home Loans, Inc. (Caliber; 28.8%), Loanstream Mortgage (Loanstream; 21.6%), and various other originators, each comprising less than 10.0% of the mortgage loans.

Although a portion of the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) 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 CFPB Qualified Mortgage (QM) rules, 1.4% of the loans by balance are designated as QM Safe Harbor, 9.4% as QM Rebuttable Presumption or Higher Priced QM, and 74.0% as non-QM. QM/ATR exempt loans consist of loans made to investors for business purposes (14.0%) and loans originated by Quontic Bank (1.1%), a Community Development Financial Institution (CDFI). While CDFI loans are not required to adhere to the ATR rules, the CDFI loans included in this pool were made to mostly creditworthy borrowers with a weighted-average credit score of 728.

There will be no advancing of delinquent principal or interest on any mortgage loan by the servicers or any other party to the transaction; however, the servicers are obligated to make advances in respect of taxes and insurance, the cost of preservation, restoration and protection of mortgaged properties, and any enforcement or judicial proceedings, including foreclosures and reasonable costs and expenses incurred in the course of servicing and disposing of properties.

On or after the date when the aggregate principal balance of the mortgage loans and any real estate owned (REO) properties is reduced to 30% of the Cut-Off Date balance, the holder of the Trust Certificates has the option to purchase all of the outstanding loans and REO properties at a price equal to the outstanding balance plus accrued and unpaid interest, including any fees, expenses, indemnification amounts, and unpaid extraordinary trust expenses.

This transaction employs a cash flow structure that is similar to many non-QM securitizations. The transaction contains a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Notes as the more senior classes are paid in full. Furthermore, excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts.

The Coronavirus Disease (COVID-19) 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 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 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 pandemic, 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 pandemic 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 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 refinancing 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 (CARES) Act, signed into law on March 27, 20.7% (as of June 30, 2020) of the borrowers had been granted forbearance or deferral plans because of financial hardship related to the pandemic. As of July 28, 2020, 63.6% of those borrowers, who requested coronavirus-related financial assistance, have made required monthly payments during the related forbearance or deferral period. The Servicers, in collaboration with the Controlling Holder, are generally offering borrowers a three-month payment deferral plan or a three-month payment forbearance plan. For the payment deferral plan, the related Servicer rolls the borrower’s next due date forward by three months and defers the principal and interest (P&I) payments due during the deferral period as a noninterest bearing deferred amount (such deferred amount will not be due until the maturity date, payoff of the mortgage, or the sale of the related mortgaged property). For the payment forbearance plan, the related Servicer forbears the borrower's payments due for the next three months, but such amounts are still due in month four and will be reported as delinquent during the forbearance period. Prior to the end of the applicable deferral or forbearance period, the Servicers will contact each related borrower to identify the options available to address related forborne payment amounts. As a result, the Servicers, in conjunction with or at the direction of the Controlling Holder, 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) no servicing advances on delinquent P&I. These assumptions include the following:
(1) Increasing delinquencies on the AAA (sf) and AA (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 (sf) rating levels.
(4) Delaying the receipt of liquidation proceeds during 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 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, published on July 22, 2020.

The ratings reflect transactional strengths that include the following:

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

The transaction also includes the following challenges:

-- Borrowers on forbearance plans,
-- No servicer advances of delinquent principal and interest,
-- The representations and warranties framework, and
-- Nonprime, non-QM, and investor loans.

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