DBRS Morningstar Assigns Provisional Ratings to BRAVO Residential Funding Trust 2020-RPL2

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage-Backed Notes, Series 2020-RPL2 (the Notes) to be issued by BRAVO Residential Funding Trust 2020-RPL2 (BRAVO 2020-RPL2 or the Trust):

-- $251.9 million Class A-1 at AAA (sf)
-- $21.6 million Class A-2 at AA (sf)
-- $273.6 million Class A-3 at AA (sf)
-- $291.8 million Class A-4 at A (sf)
-- $309.1 million Class A-5 at BBB (sf)
-- $18.3 million Class M-1 at A (sf)
-- $17.3 million Class M-2 at BBB (sf)
-- $11.2 million Class B-1 at BB (sf)
-- $10.4 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 Notes reflects 35.90% of credit enhancement provided by subordinated notes. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 30.40%, 25.75%, 21.35%, 18.50%, and 15.85% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of seasoned reperforming first-lien residential mortgages funded by the issuance of the Notes, which are backed by 2,149 loans with a total principal balance of $393,055,016 as of the Cut-Off Date (September 30, 2020).

The loans are approximately 167 months seasoned and contain 90.4% modified loans. The modifications happened more than two years ago for 94.1% of the modified loans. Within the pool, 911 mortgages have non-interest-bearing deferred amounts, which equate to approximately 11.1% of the total principal balance. Additionally, there are twenty loans with Home Affordable Modification Program and proprietary principal forgiveness (PRA) amounts, which comprise less than 0.1% of the total principal balance. These PRA amounts will not be included in the offered note balances and will be allocated separately to the Class PRA Notes.

As of the Cut-Off Date, 90.9% of the pool is current, 4.7% is 30 days delinquent under the Mortgage Bankers Association (MBA) delinquency method, and 4.4% is in bankruptcy. All bankruptcy loans are either current or 30 days delinquent. Approximately 78.1% and 80.4% of the mortgage loans have been zero times 30 days delinquent for the past 24 months and 12 months, respectively, under the MBA delinquency method.

The majority of the pool (99.5%) is not subject to the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules. The remaining 0.5% of the pool may be subject to the ATR rules but a designation was not provided. As such, DBRS Morningstar assumed these loans to be non-QM in its analysis

PMIT Residential Funding I LLC. (the Depositor), an affiliate of Loan Funding Structure LLC (the Sponsor), will acquire the loans and will contribute them to the Trust. The Sponsor or one of its majority-owned affiliates will acquire and retain a 5% eligible vertical interest in the offered Notes, consisting of 5% of each class to satisfy the credit risk retention requirements.

The mortgage loans will be serviced by Rushmore Loan Management Services LLC. For this transaction, the aggregate servicing fee paid from the Trust will be 0.25%.

There will not be any advancing of delinquent principal or interest on any mortgages by the Servicer or any other party to the transaction; however, the Servicer is obligated to make advances in respect of homeowner association fees, taxes, and insurance as well as reasonable costs and expenses incurred in the course of servicing and disposing of properties.

When the aggregate pool balance is reduced to less than 10% of the balance as of the Cut-Off Date, the holder of the Trust certificates may purchase all of the mortgage loans and real estate owned (REO) properties from the issuer at a price equal to the sum of principal balance of the mortgage loans; accrued and unpaid interest thereon; the fair market value of REO properties net of liquidation expenses; unpaid servicing advances; and any fees, expenses, or other amounts owed to the transaction parties (optional termination).

The transaction employs a sequential-pay cash flow structure. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M-1 and more subordinate bonds will not be paid from principal proceeds until the Class A-1 and A-2 Notes are retired.

Coronavirus Pandemic and Forbearance
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.

Reperforming Loans (RPL) is a traditional RMBS asset class that consists of securitizations backed by pools of seasoned performing and reperforming residential home loans. Although borrowers in these pools may have experienced delinquencies in the past, the loans have been largely performing for the past six months to 24 months since issuance. Generally, these pools are highly seasoned and contain sizable concentrations of previously modified loans.

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: September Update,” published on September 10, 2020) for the RPL 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 RPL asset class, while the full effect of the coronavirus pandemic may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans that were previously delinquent, recently modified, or have higher updated loan-to-value ratios (LTVs) may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert back to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinancing opportunities and, therefore, slower prepayments.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, 2020, approximately 14.6% of the borrowers are on or have completed a relief plan because the borrowers reported financial hardship related to the pandemic but currently only 2.9% of the borrowers are on an active pandemic-related relief plan. These deferral or forbearance plans allow temporary payment holidays, followed by repayment once the specified period ends. DBRS Morningstar understands that the Servicer generally offers the deferral of the unpaid principal and interest amounts as a main form of payment relief in place of a repayment plan. A deferral creates a non-interest-bearing amount that is due and payable at the maturity of the contract or when the contract is refinanced. The loans for which the deferrals were granted are reported as current for the duration of the deferral period, though the actual payments are not made but deferred. The Servicer may also pursue other loss mitigation options, as applicable.

For this transaction, 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 (P&I) collections and (2) no servicing advances on delinquent P&I payments. These assumptions include:
(1) Increased delinquencies for the first 12 months at the AAA (sf) and AA (sf) rating levels.
(2) Increased delinquencies for the first nine months at the A (sf) and below rating levels.
(3) No voluntary prepayments for the first 12 months for the AAA (sf) and AA (sf) rating levels.
(4) No liquidation recovery for the first 12 months for the AAA (sf) and AA (sf) rating levels.

The ratings reflect transactional strengths that include the following:
-- Seasoning,
-- Clean payment history,
-- Sequential-pay structure with excess cash flow available to pay principal, and
-- Satisfactory third party due diligence review.

The transaction also includes the following challenges:
-- Representations and warranties standard,
-- No servicer advances of delinquent P&I, and
-- Borrowers on coronavirus-related relief plans.

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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