DBRS Morningstar Finalizes Provisional Rating on Citigroup Mortgage Loan Trust 2020-RP2

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the Mortgage-Backed Notes, Series 2020-RP2 (the Notes) issued by Citigroup Mortgage Loan Trust 2020-RP2 (the Trust) as follows:

-- $689.8 million Class A-1 at AAA (sf)

The AAA (sf) rating on the Notes reflects 34.75% of credit enhancement provided by subordinated certificates.

Other than the specified class above, DBRS Morningstar does not rate any other classes in this transaction.

The Trust is a securitization of a portfolio of seasoned performing and reperforming first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 6,739 loans with a total principal balance of $1,057,137,203 as of the Cut-Off Date (October 31, 2020).

The loans are approximately 167 months seasoned. As of the Cut-Off Date, 90.5% of the loans are current, including three bankruptcy-performing loans. Approximately 11.5% and 45.5% of the mortgage loans have been zero times 30 days delinquent for the past 24 months and 12 months, respectively, under the Mortgage Bankers Association delinquency method.

The portfolio contains 90.0% modified loans. The modifications happened more than two years ago for 61.3% of the modified loans. Within the pool, 2,120 mortgages have aggregate noninterest-bearing deferred amounts of $80,144,301, which comprise approximately 7.6% of the total principal balance.

Approximately 2.5% of the loans in the pool are subject to the Consumer Financial Protection Bureau Ability-to-Repay and Qualified Mortgage rules. These loans are designated as either Safe Harbor or Temporary Safe Harbor. The remainder of the pool is exempt due to seasoning or loan purpose.

The Seller, Citigroup Global Markets Realty Corp. (CGMRC), acquired the mortgage loans from Fannie Mae following the award of a bid in connection with a competitive auction for the initial pool. The Seller will then contribute the loans to the Trust through an affiliate, Citigroup Mortgage Loan Trust Inc. (the Depositor). As the Sponsor, CGMRC or one of its majority-owned affiliates will acquire and retain a 5% eligible vertical interest in each class of Notes (other than the Class R Notes) to satisfy the credit risk retention requirements. The loans were originated and previously serviced by various entities.

As of the Cut-Off Date, the loans are serviced by an interim servicer. Such servicing will be transferred to Select Portfolio Servicing, Inc. on December 14, 2020. 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 in super lien states and, in certain cases, 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 25% of the balance as of the Cut-off Date, the directing noteholder may purchase all of the mortgage loans and real-estate-owned properties from the Issuer, as long as the aggregate proceeds meet a minimum price.

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

The ratings reflect transactional strengths that include underlying assets that demonstrate improving performance in the recent past, lengthy seasoning, and a strong representations and warranties (R&W) provider (CGMRC). Additionally, a comprehensive third-party due-diligence review was performed on the portfolio with respect to regulatory compliance, servicing comments, data integrity, payment histories, and title and tax review. Updated broker price opinions were provided for 100% of the pool; however, reconciliations were not performed on the updated values.

The lack of P&I advances on delinquent mortgages may increase the possibility of periodic interest shortfalls to the Noteholders; however, principal proceeds can be used to pay interest to the Notes sequentially, and subordination levels are greater than expected losses for the rated Notes, which may provide for timely payment of interest to the rated Notes.

The transaction employs an R&W framework that includes certain weaknesses such as knowledge qualifiers, a fraud representation that is limited to the time period when the Seller owned the loans, and carveouts for loans with known findings or unavailable information. Mitigating factors include (1) a financially strong R&W provider (CGMRC), (2) a comprehensive due-diligence review, (3) automatic or designated breach review triggers dependent on certain conditions, and (4) significant loan seasoning and relatively clean performance history in recent years.

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 security (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 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 it previously used. DBRS Morningstar derives such MVD assumptions through a fundamental home price approach based on the forecasted unemployment rates and GDP growth outlined in the 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 effects of the coronavirus pandemic may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans which were previously delinquent, recently modified, or have higher updated loan-to-value (LTV) ratios 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 to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance 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, 5.9% of the borrowers are on or have completed coronavirus-related relief plans because the borrowers reported financial hardship related to the coronavirus pandemic. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends. The interim servicer generally offered borrowers a three-month payment forbearance plan. Beginning in month four, the borrower can repay all of the missed mortgage payments at once 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 needs to make regular payments and additional amounts to catch up on the missed payments. The interim servicer or the Servicer, as applicable, 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, the interim servicer or Servicer may offer a repayment plan or other forms of payment relief, such as deferrals of the unpaid P&I amounts, forbearance extensions, or a loan modification, in addition to pursuing other loss mitigation options.

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 P&I collections and (2) no servicing advances on delinquent P&I. These assumptions include:

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

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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