DBRS Morningstar Finalizes Provisional Ratings on Imperial Fund Mortgage Trust 2020-NQM1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2020-NQM1 (the Certificates) issued by Imperial Fund Mortgage Trust 2020-NQM1 (the Trust):

-- $89.1 million Class A-1 at AAA (sf)
-- $10.2 million Class A-2 at AA (high) (sf)
-- $18.4 million Class A-3 at A (low) (sf)
-- $8.8 million Class M-1 at BBB (low) (sf)
-- $7.2 million Class B-1 at B (high) (sf)

The AAA (sf) rating on the Class A-1 Certificates reflects 38.80% of credit enhancement provided by subordinated Certificates. The AA (high) (sf), A (low) (sf), BBB (low) (sf), and B (high) (sf) ratings reflect 31.80%, 19.15%, 13.10%, and 8.15% 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 prime and non-prime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 457 loans with a total principal balance of $145,563,679 as of the Cut-Off Date (September 1, 2020).

This is the first transaction by Imperial Fund I, LLC (Imperial Fund) as Issuer. While the overall collateral characteristics are comparable to other non-QM pools, there are a few characteristics unique to the Trust: (1) a notable share of the collateral comprises loans originated to foreign national (14.2%) and to non-resident alien borrowers (2.7%; together, known as foreign borrowers), some of which do not have FICO scores provided by the U.S. credit bureaus; (2) overall, 3.9% of the collateral are loans to borrowers with no FICO score; and (3) a large population of the loans (60.5%) is concentrated in Florida.

The originators for the aggregate mortgage pool are A&D Mortgage (ADM; 99.5%) and various other originators, each comprising less than 0.3% of the loans. The mortgage loans not originated by ADM were originated by ADM's correspondent lenders to ADM's underwriting standards. ADM originated the mortgages primarily under the following seven programs: Super Prime, Prime, Prime Access, Premier, Premier Access, Foreign National, and Debt Service Coverage Ratio. For more information regarding these programs, see the related rating report.

ADM is the Servicer for all loans. Specialized Loan Servicing LLC will subservice the mortgage loans beginning on or about the Closing Date. Imperial Fund will act as the Sponsor and Servicing Administrator, and Nationstar Mortgage LLC will act as the Master Servicer. Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) will act as the Securities Administrator and Certificate Registrar. Wilmington Trust National Association (rated AA (low) with a Negative trend by DBRS Morningstar) will serve as the Custodian and Wilmington Savings Fund Society, FSB will act as the Trustee.

In accordance with U.S. credit risk retention requirements, Imperial Fund as the Sponsor, either directly or through a Majority-Owned Affiliate, will retain an eligible horizontal residual interest consisting of the Class B-3 and Class X Certificates (together, the “Risk Retained Certificates”), representing not less than 5% economic interest in the transaction, to satisfy the requirements under Section 15G of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.

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 described above. In accordance with the CFPB Qualified Mortgage (QM)/ATR rules, 49.1% are designated as non-QM. Approximately 50.9% of the loans are made to investors for business purposes and are thus not subject to the QM/ATR rules.

The Servicer will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent, contingent upon recoverability determination. 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 Sponsor will have the option, but not the obligation, to repurchase any nonliquidated mortgage loan that is 90 or more days delinquent under the Mortgage Bankers Association (MBA) method (or, in the case of any Coronavirus Disease (COVID-19) forbearance loan, such mortgage loan becomes 90 or more days MBA Delinquent after the related forbearance period ends) at the Repurchase Price, provided that such repurchases in aggregate do not exceed 7.5% of the total principal balance as of the Cut-Off Date.

On or after the earlier of September 2023 or the date when the collateral pool balance is reduced to or below 30% of the Cut-Off Date balance, Imperial Fund Mortgage Depositor LLC (the Depositor) has the option to purchase all outstanding certificates (Optional Redemption) at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such a purchase, the Depositor then has the option to complete a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds to the appropriate holders of regular or residual interests.

On any date following the date on which the collateral pool balance is less than or equal to 10% of the Cut-Off Date balance, the Servicing Administrator and the Servicer will have the option to terminate the transaction by purchasing all of the mortgage loans and any real-estate owned (REO) property. The purchase price will be equal to the sum of the aggregate stated principal balance of the mortgage loans (other than any REO property) plus applicable 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 transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches. Interest payments and shortfalls on the Class A-1, A-2, and A-3 Certificates can be paid sequentially from the principal remittance waterfall when the trigger event is not in effect. Also, principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 Certificates sequentially (IIPP) after a delinquency or cumulative loss trigger event has occurred. For more subordinate Certificates, principal proceeds can be used to cover interest shortfalls as the more senior Certificates 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 down to Class B-1.

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 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 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, 0.6% of the loans had been granted forbearance plans because the borrowers reported financial hardship related to the coronavirus. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends. The Servicer is generally offering borrowers a three-month payment forbearance plan and would attempt to contact the borrowers before the expiration of the forbearance period to evaluate the borrowers' capacity to repay the missed amounts. 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. During the repayment period, the borrower needs to make regular payments and additional amounts to catch up on the missed payments. As a result, the Servicer may offer 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:
(1) Increasing delinquencies for the AAA (sf) and AA (high) (sf) rating levels for the first 12 months,
(2) Increasing delinquencies for the A (low) (sf) and below rating levels for the first nine months,
(3) Applying no voluntary prepayments for the AAA (sf) and AA (high) (sf) rating levels for the first 12 months, and
(4) Delaying the receipt of liquidation proceeds for the AAA (sf) and AA (high) (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:

-- substantial borrower equity, robust loan attributes, and pool composition;
-- compliance with the ATR rules;
-- satisfactory third-party due-diligence review;
-- current loans; and
-- improved underwriting standards.

The transaction also includes the following challenges:

-- nonprime, non-QM, and investor loans;
-- three-month advances of delinquent P&I;
-- representations and warranties framework;
-- servicers’ financial capability;
-- foreign borrowers with no FICO score; and
-- borrowers on forbearance plans.

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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