DBRS Morningstar Finalizes its Provisional Ratings on OBX 2020-EXP3 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2020-EXP3 (the Notes) issued by OBX 2020-EXP3 Trust (the Trust):

-- $180.4 million Class 1-A-1 at AAA (sf)
-- $45.1 million Class 1-A-2 at AAA (sf)
-- $225.5 million Class 1-A-3 at AAA (sf)
-- $9.9 million Class 1-A-4 at AAA (sf)
-- $235.4 million Class 1-A-5 at AAA (sf)
-- $180.4 million Class 1-A-IO1 at AAA (sf)
-- $45.1 million Class 1-A-IO2 at AAA (sf)
-- $225.5 million Class 1-A-IO3 at AAA (sf)
-- $9.9 million Class 1-A-IO4 at AAA (sf)
-- $235.4 million Class 1-A-IO5 at AAA (sf)
-- $235.4 million Class 1-A-IO6 at AAA (sf)
-- $180.4 million Class 1-A-6 at AAA (sf)
-- $45.1 million Class 1-A-7 at AAA (sf)
-- $225.5 million Class 1-A-8 at AAA (sf)
-- $9.9 million Class 1-A-9 at AAA (sf)
-- $235.4 million Class 1-A-10 at AAA (sf)
-- $108.2 million Class 1-A-11 at AAA (sf)
-- $108.2 million Class 1-A-11X at AAA (sf)
-- $108.2 million Class 1-A-12 at AAA (sf)
-- $225.5 million Class 1-A-IO71 at AAA (sf)
-- $225.5 million Class 1-A-IO72 at AAA (sf)
-- $9.9 million Class 1-A-IO81 at AAA (sf)
-- $9.9 million Class 1-A-IO82 at AAA (sf)
-- $235.4 million Class 1-A-IO781 at AAA (sf)
-- $235.4 million Class 1-A-IO782 at AAA (sf)
-- $148.9 million Class 2-A-1A at AAA (sf)
-- $37.2 million Class 2-A-1B at AAA (sf)
-- $186.2 million Class 2-A-1 at AAA (sf)
-- $8.1 million Class 2-A-2 at AAA (sf)
-- $194.3 million Class 2-A-3 at AAA (sf)
-- $194.3 million Class 2-A-IO at AAA (sf)
-- $10.3 million Class B-1 at A (high) (sf)
-- $10.3 million Class B1-IO1 at A (high) (sf)
-- $10.3 million Class B1-IO2 at A (high) (sf)
-- $10.3 million Class B1-A at A (high) (sf)
-- $10.3 million Class B1-B at A (high) (sf)
-- $23.7 million Class B2-1 at A (sf)
-- $23.7 million Class B2-1-IO1 at A (sf)
-- $23.7 million Class B2-1-IO2 at A (sf)
-- $23.7 million Class B2-1-A at A (sf)
-- $23.7 million Class B2-1-B at A (sf)
-- $6.2 million Class B2-2 at A (low) (sf)
-- $6.2 million Class B2-2-IO1 at A (low) (sf)
-- $6.2 million Class B2-2-IO2 at A (low) (sf)
-- $6.2 million Class B2-2-A at A (low) (sf)
-- $6.2 million Class B2-2-B at A (low) (sf)
-- $14.2 million Class B-3 at BBB (sf)
-- $7.7 million Class B-4 at BB (high) (sf)
-- $4.9 million Class B-5 at BB (low) (sf)
-- $4.9 million Class B6-1 at B (sf)

Classes 1-A-IO1, 1-A-IO2, 1-A-IO3, 1-A-IO4, 1-A-IO5, 1-A-IO6, 1-A-11X, 1-A-IO71, 1-A-IO72, 1-A-IO81, 1-A-IO82, 1-A-IO781, 1-A-IO782, 2-A-IO, B1-IO1, B1-IO2, B2-1-IO1, B2-1-IO2, B2-2-IO1, and B2-2-IO2 are interest-only (IO) notes. The balances represent notional amounts.

Classes 1-A-3, 1-A-5, 1-A-6, 1-A-7, 1-A-8, 1-A-9, 1-A-10, 1-A-11, 1-A-12, 1-A-IO3, 1-A-IO5, 1-A-IO6, 1-A-11X, 2-A-1, 2-A-3, 1-A-IO781, 1-A-IO782, B1-A, B1-B, B2-1-A, B2-1-B, B2-2-A, and B2-2-B Notes are exchangeable notes. These classes can be exchanged for combinations of initial exchangeable notes as specified in the offering documents.

Classes 1-A-1, 1-A-2, 1-A-3, 1-A-6, 1-A-7, 1-A-8, 1-A-11, 1-A-12, 2-A-1A, 2-A-1B, and 2-A-1 are super senior notes. These classes benefit from additional protection from the senior support notes (Classes 1-A-4, Class 1-A-9, and Class 2-A-2) with respect to loss allocation.

The AAA (sf) ratings on the Notes reflect 16.50% of credit enhancement provided by subordinated notes in the pool. The A (high) (sf), A (sf), A (low) (sf), BBB (sf), BB (high) (sf), BB (low) (sf) and B (sf) ratings reflect 14.50%, 9.90%, 8.70%, 5.95%, 4.45%, 3.50%, and 2.55% 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 newly originated and seasoned, first-lien, fixed- and adjustable-rate expanded prime residential mortgages funded by the issuance of the Notes. The Notes are backed by 1,050 loans with a total principal balance of $514,609,134 as of the Cut-Off Date (September 1, 2020).

The loans were originated by Oaktree Funding Corporation (Oaktree; 15.7%), loanDepot.com, LLC (11.4%), and various other lenders, each comprising no more than 10% of the pool. The Seller, Onslow Bay Financial LLC (Onslow Bay), acquired the loans prior to the Closing Date either (1) from the originators directly or (2) from a third-party aggregator. The Seller either applied (1) its own acquisition criteria or (2) the underlying lenders' underwriting guidelines, if such guides generally fell within the Seller's required parameters. On the Closing Date, Onslow Bay, through an affiliate, Onslow Bay Funding LLC (the Depositor), will contribute the loans to the Trust. Since 2018, Onslow Bay has issued six expanded prime transactions.

The loans will be serviced by Select Portfolio Servicing, Inc. (60.7%), NewRez LLC doing business as Shellpoint Mortgage Servicing (33.9%), and Specialized Loan Servicing LLC (5.4%). Onslow Bay will act as the Principal and Interest (P&I) Advancing Party. Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Negative trend by DBRS Morningstar) will act as the Paying Agent, Master Servicer, Note Registrar, and Custodian. Wilmington Savings Fund Society, FSB will serve as Indenture and Owner Trustee.

Although the applicable 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 products for various reasons. In accordance with the CFPB Qualified Mortgage (QM)/ATR rules, 7.2% of the loans are designated as QM Safe Harbor, 0.7% are designated as QM Rebuttable Presumption, and 41.4% are designated as non-QM. Approximately 45.6% of the loans are exempt from the QM/ATR rules because they were either (1) made to investors for business purposes (including 24.2% agency eligible investor loans) or (2) originated prior to implementation of the rules.

Additionally, one lender, designated by the U.S. Department of the Treasury as a Community Development Financial Institution (CDFI), originated 5.1% of the loans. While loans originated by a CDFI are not required to comply with the ATR rules, the CDFI loans included in this pool were made to mostly creditworthy borrowers with a weighted-average (WA) debt-to-income (DTI) ratio of 34.3% and a WA credit score of 759.

The P&I Advancing Party will generally fund advances of delinquent P&I on a mortgage until such loan becomes 120 days delinquent, if such advances are deemed to be recoverable. The Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties.

The Seller will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent under the Mortgage Bankers Association (MBA) method at the optional repurchase price, provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date. For loans subject to Coronavirus Disease (COVID-19) forbearance plans, delinquencies are counted once the forbearance period ends.

Because of the CDFI loans included in the securitization, OBX 2020-EXP3 is subject to an adjusted required credit risk. Under U.S. Risk Retention rules, the percentage retained by the securitizer is eligible to be reduced by the ratio of the CDFI loan balances to the aggregate pool balance. As such, the Seller, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of at least 4.75% of the Notes to satisfy the credit risk retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

The transaction employs a senior-subordinate, shifting-interest cash flow structure that is enhanced from a pre-crisis structure. Group 1 and Group 2 senior notes will be backed by collateral from each respective pool. The subordinate notes will be cross-collateralized between the two pools. This is generally known as a Y-Structure.

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 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 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 Form W-2, Wage and Tax Statements (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: September Update,” published on September 10, 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 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, 2020, 19.6% of the borrowers had been granted, or requested, forbearance plans because the borrowers reported financial hardship related to coronavirus. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends. The Servicers are 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, extend the forbearance, or opt to go on a repayment plan to catch up on missed payments for a maximum generally of six months. During the repayment period, the borrower is required to make regular payments as well as additional amounts to catch up on the missed payments. Prior to the expiration of the forbearance period, the related Servicer would attempt to contact the borrower and evaluate their capacity to repay the missed amounts. As a result, the related Servicer may offer a repayment plan or other forms of payment relief, such as deferrals of the unpaid P&I amounts or a loan modification, in addition to pursuing other loss mitigation options.

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:
-- Increasing delinquencies for the AAA (sf) rating levels for the first 12 months,
-- Increasing delinquencies for the A (high) (sf) and below rating levels for the first nine months,
-- Applying no voluntary prepayments for the AAA (sf) rating levels for the first 12 months, and
-- Delaying the receipt of liquidation proceeds for the AAA (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: September Update,” dated September 10, 2020.

The ratings reflect transactional strengths that include the following:
-- Robust loan attributes and pool composition,
-- Improved underwriting standards,
-- Satisfactory third-party due-diligence review,
-- Faster prepayments across non-QM,
-- Compliance with ATR rules, and
-- Structural enhancements.

The transaction also includes the following challenges:
-- Borrowers on forbearance plans;
-- Nonprime, non-QM, CDFI, and Investor Loans;
-- Advances of Delinquent P&I; and
-- Representations and Warranties Framework and Provider.

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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