DBRS Morningstar Finalizes Provisional Ratings on Towd Point HE Trust 2021-HE1

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Asset-Backed Securities, Series 2021-HE1 (the Notes) issued by Towd Point HE Trust 2021-HE1 (TPHT 2021-HE1):

-- $316.5 million Class A1 at AAA (sf)
-- $21.2 million Class A2 at AA (sf)
-- $41.0 million Class M1 at A (sf)
-- $25.1 million Class M2 at BBB (low) (sf)
-- $16.9 million Class B1 at BB (low) (sf)
-- $11.1 million Class B2 at B (sf)
-- $62.2 million Class A3 at A (sf)
-- $378.7 million Class A4 at A (sf)
-- $93.9 million Class A5 at A (sf)
-- $21.2 million Class A2A at AA (sf)
-- $21.2 million Class A2AX at AA (sf)
-- $21.2 million Class A2B at AA (sf)
-- $21.2 million Class A2BX at AA (sf)
-- $41.0 million Class M1A at A (sf)
-- $41.0 million Class M1AX at A (sf)
-- $41.0 million Class M1B at A (sf)
-- $41.0 million Class M1BX at A (sf)
-- $25.1 million Class M2A at BBB (low) (sf)
-- $25.1 million Class M2AX at BBB (low) (sf)
-- $25.1 million Class M2B at BBB (low) (sf)
-- $25.1 million Class M2BX at BBB (low) (sf)
-- $25.1 million Class M2C at BBB (low) (sf)
-- $25.1 million Class M2CX at BBB (low) (sf)
-- $16.9 million Class B1A at BB (low) (sf)
-- $16.9 million Class B1AX at BB (low) (sf)
-- $16.9 million Class B1B at BB (low) (sf)
-- $16.9 million Class B1BX at BB (low) (sf)
-- $16.9 million Class B1C at BB (low) (sf)
-- $16.9 million Class B1CX at BB (low) (sf)
-- $11.1 million Class B2A at B (sf)
-- $11.1 million Class B2AX at B (sf)
-- $11.1 million Class B2B at B (sf)
-- $11.1 million Class B2BX at B (sf)
-- $11.1 million Class B2C at B (sf)
-- $11.1 million Class B2CX at B (sf)

Classes A2AX, A2BX, M1AX, M1BX, M2AX, M2BX, M2CX, B1AX, B1BX, B1CX, B2AX, B2BX, and B2CX are interest-only notes. The class balances represent a notional amount.

Classes A3, A4, A5, A2A, A2AX, A2B, A2BX, A3, A4, A5, M1A, M2AX, M1B, M1BX, M2A, M2AX, M2B, M2BX, M2C, M2CX, B1A, B1AX, B1B, B1BX, B1C, B1CX, B2A, B2AX, B2B, B2BX, B2C, and B2CX are exchangeable notes. These classes can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) rating on the Notes reflects 34.40% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (low) (sf), BB (low) (sf), and B (sf) ratings reflect 30.00%, 21.50%, 16.30%, 12.80%, and 10.50% of credit enhancement, respectively.

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

This transaction is a securitization of a portfolio of seasoned performing and reperforming first- and junior-lien mortgage loans and revolving home equity lines of credit (HELOC) funded by the issuance of asset-backed notes (the Notes). The Notes are backed by 13,033 loans and HELOCs with a total principal balance of $482,441,990 as of the Cut-Off Date (January 31, 2020).

The Notes are backed by 13,733 loans and HELOCs with a total principal balance of $517,181,094 as of the Statistical Calculation Date (December 31, 2020). Unless specified otherwise, all the statistics regarding the mortgage loans in this report are based on the Statistical Calculation Date.

As of the Statistical Calculation Date, the collateral pool consists of four cohorts of loans: (1) 1,641 first-lien open HELOCs (Open First Liens) with a total unpaid principal balance (UPB) of $55,939,407 (10.8% by balance) and a total current credit limit of $99,920,975; (2) 2,736 junior-lien open HELOCs (Open Junior Liens) with a total UPB of $78,108,411 (15.1% by balance) and a total current credit limit of $125,165,005; (3) 1,459 first-lien performing and reperforming mortgage loans (Closed First Liens) with a total UPB of $103,168,487 (20.0% by balance); and (4) 7,897 junior-lien mortgage loans (Closed Junior Liens) with a total UPB of $279,964,789 (54.1% by balance). The table on page 12 in the Collateral Analysis Details section of the rating report summarizes the collateral attributes and the loans' and HELOCs' performance history. Additional key collateral characteristic comparisons to previously issued DBRS Morningstar-rated TPMT and TPHT transactions can be found in Appendix B through D in the rating report.

The transaction includes seasoned first-lien performing and reperforming mortgages, which represent 20.0% of the pool and have collateral attributes and performance history generally similar to the loans included in previously issued TPMT seasoned reperforming loan (RPL) securitizations. Approximately 54.1% of the pool consists of junior-lien mortgages with collateral attributes generally similar to those included in previously issued securitizations under the TPMT SJ series deals. First- and junior-lien HELOCs, approximately 25.9% of the pool, have characteristics somewhat comparable to those included in the previous TPHT securitization issued in 2019.

HELOC loans generally have a draw period during which borrowers may make draws up to a credit limit, which would result in increased loan balances. The first- and junior-liens in this securitization have a generally 10-year draw period and a repayment period of generally 15 years consistent with a traditional HELOC mortgage loan. During the repayment period, borrowers are no longer allowed to draw. In addition, their monthly principal payments during the repayment period will equal an amount that allows the outstanding loan balance to evenly amortize down over this 15-year term. Borrowers for the first- and junior-liens are generally only required to make accrued and unpaid interest payments during the draw period. Please refer to Appendix 7 of the RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology for the applicable analytics used to estimate expected losses for HELOCs.

The portfolio is approximately 138 months seasoned and contains 29.5% modified loans. The modifications happened more than two years ago for 83.9% of the modified loans. Within the pool, 928 mortgages have non-interest-bearing deferred amounts totaling $12,355,667, which equate to approximately 2.4% of the total principal balance. About 3.9% of the loans by balance have been modified under the Home Affordable Modification Program (HAMP). There are no HAMP or proprietary principal forgiveness amounts included in the deferred amounts.

FirstKey Mortgage, LLC (FirstKey) is the Sponsor, Seller, and Asset Manager of the transaction. FirstKey will acquire the loans from various transferring trusts on or prior to the Closing Date. FirstKey, through a wholly owned subsidiary, Towd Point Asset Funding, LLC (the Depositor), will contribute loans to the Trust. These loans were originated and previously serviced by various entities through purchases in the secondary market.

The loans will be serviced by Select Portfolio Servicing, Inc. (57.9%) and Specialized Loan Servicing LLC (SLS; 42.1%). SLS will service 100% of the HELOC mortgage loans initially. The initial aggregate servicing fee for the TPHT 2021-HE1 portfolio will be 1.20% per year.

U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will serve as the Indenture Trustee, Administrator, Certificate Registrar, and Custodian. Wells Fargo Bank, N.A. (rated AA with a Negative trend by DBRS Morningstar) will act as the Custodian.

A majority-owned affiliate of the Sponsor will acquire and intends to retain a vertical 5% interest in each class of securities (other than the Class R and D Certificates) to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

In this transaction, any junior-lien HELOC or loan that is 180 days delinquent under the Mortgage Bankers Association (MBA) delinquency method will be considered a Charged-Off Loan. With respect to such loans, the total UPB will be considered a realized loss. In its analysis, DBRS Morningstar assumes no recoveries upon default of any junior liens in this pool.

This transaction utilizes a structural mechanism similar to the one used in the previously issued TPHT transaction to fund future draw requests. As the initial servicer of all HELOC mortgage loans, SLS is obligated to fund draws and is entitled to reimburse itself for such draws prior to any payments on the Notes first from the related principal collections of the mortgage loans it services and then from all principal collections. If the aggregate draws exceed the principal collections (Net Draw), then SLS can request reimbursement from amounts on deposit in the variable-funding account (VFA), which has an initial balance of $250,000. On each monthly Payment Date, the holder of the Class D Certificates is required to deposit an amount equal to any unreimbursed Net Draws into the VFA. The principal balance of the Class D Certificates will increase by any Net Draws funded using amounts in the VFA.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the more senior tranches (Class A1, A2, and M1 Notes) subject to a sequential priority trigger as described in the rating report. The Class D Certificates have a pro rata principal distribution with all senior and subordinate tranches while the Trigger Event is not in effect. When the trigger is in effect, the Class D Certificates principal distribution will be subordinated to both the senior and subordinate notes in the payment waterfall. While a Trigger Event is in effect, realized losses will be allocated reverse sequentially starting with the Class D Certificates followed by the subordinate and senior notes based on their respective payment priority. While a Trigger Event is not in effect, the losses will be allocated pro rata between the Class D Certificates and all outstanding notes based on their respective priority of payments. The outstanding notes will allocate realized losses reverse sequentially, first to Class B, second to Class M, and third to Class A Notes.

There will be no advancing of delinquent principal or interest on the mortgages by the Servicers or any other party to the transaction; however, the Servicers are obligated to make advances for the first-lien loans in respect of homeowner association fees, taxes and insurance, installment payments on energy improvement liens, as well as reasonable costs and expenses incurred in the course of servicing and disposing properties. SLS, as the initial servicer of all HELOC mortgage loans, is also obligated to fund any monthly Net Draws, as noted above.

As of the Statistical Calculation Date, 96.6% of the pool is current and 2.4% is 30 days delinquent, under the MBA delinquency method. Additionally, 1.0% of the pool is in bankruptcy (all bankruptcy loans are performing or 30 days delinquent). Approximately 70.2% of the mortgage loans have been zero times 30 days delinquent (0 x 30) for at least the past 24 months under the MBA delinquency method.

The majority of the pool (99.8%) is exempt from the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules. The loans subject to the ATR rules are designated as QM Safe Harbor (0.2%). HELOCs are not subject to the ATR/QM rules.

On the payment date occurring on or after the payment date in February 2025 (the First Optional Redemption Date), the Issuer may, at its option, upon the direction of the Class X Representative, redeem all the outstanding Notes and Certificates, so long as the aggregate proceeds from such redemption exceeds the minimum price, as provided in the transaction's documents (Issuer Optional Redemption). The Class X Representative is initially Towd Point Asset Depositor LLC as appointed by the holder or holders of more than 50% of the Class X Certificates.

When the aggregate pool balance is reduced to less than 10% of the balance as of the Cut-off Date, the majority representative as appointed by the holder(s) of more than 50% of the notional amount of the Class X Certificates, may purchase all of the mortgage loans, real estate owned (REO) properties and other properties from the Issuer, as long as the aggregate proceeds meet a minimum price (Optional Clean-Up Call).

When the aggregate pool balance of the mortgage loans is reduced to less than 30.0% of the Cut-Off Date balance, the holders of more than 50% of the Class X Certificates will have the option to cause the Issuer to sell all of its remaining property (other than amounts in the Breach Reserve Account) to one or more third-party purchasers so long as the aggregate proceeds meets a minimum price (Bulk Sale Right).

FirstKey, as the Asset Manager, has the ability to supervise the sale of eligible nonperforming loans, charged-off loans or REO properties to unaffiliated third parties individually or in bulk sales. The sales require an asset sale price or an aggregate sale price, as applicable, to at least equal a minimum reserve amount, as described in the transaction documents.

Coronavirus Disease (COVID-19) 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.

RPL is a traditional RMBS asset class that consists of securitizations backed by pools of seasoned performing and reperforming residential first- and junior- lien home loans and HELOCs. 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, 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 the respective 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: January 2021 Update,” published on January 28, 2021), 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 forecast 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 effect of the coronavirus 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 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 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, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, mandates that all mortgagors with government-backed mortgages be allowed to delay at least 180 days of monthly payments (followed by another period of 180 days if the mortgagor requests it). For loans not subject to the CARES Act, servicers may still provide payment relief to borrowers who report financial hardship related to coronavirus. Within this pool, although not subject to the CARES Act, 9.6% of the borrowers are on or have been on coronavirus-related forbearance or deferral plans. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends or a deferral of the forborne balance.

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. These assumptions include:
-- Increased delinquencies for the first 12 months for first-liens or six months for junior-liens at the AAA (sf) and AA (sf) rating levels,
-- Increased delinquencies for the first nine months for first-liens or three months for junior-liens at the A (sf) and below rating levels,
-- No voluntary prepayments for the first 12 months for the AAA (sf) and AA (sf) rating levels,
-- No liquidation recovery for 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: January 2021 Update,” dated January 28, 2021.

The DBRS Morningstar ratings of AAA (sf) and AA (sf) address the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related notes. The DBRS Morningstar ratings of A (sf), BBB (low) (sf), BB (low) (sf), and B (sf) address the ultimate payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related notes.

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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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