DBRS Morningstar Assigns Provisional Ratings to BRAVO Residential Funding Trust 2021-HE2

DBRS, Inc. (DBRS Morningstar) assigned the following ratings to the Mortgage-Backed Notes, Series 2021-HE2 (the Notes) to be issued by BRAVO Residential Funding Trust 2021-HE2 (BRAVO 2021-HE2 or the Trust):

-- $202.9 million Class A-1 at AAA (sf)
-- $16.0 million Class A-2 at AA (sf)
-- $17.5 million Class A-3 at A (sf)
-- $13.5 million Class M-1 at BBB (sf)
-- $13.3 million Class B-1 at BB (sf)
-- $8.1 million Class B-2 at B (sf)

The AAA (sf) rating on the Notes reflects 31.10% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 25.65%, 19.70%, 15.10%, 10.60%, and 7.85% of credit enhancement, respectively.

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

This is a securitization of a portfolio of seasoned first- and junior-lien revolving home equity lines of credit (HELOC) and home equity mortgage loans funded by the issuance of the Notes. The Notes are backed by 5,067 HELOCs (including multiple segments of the same loan at different interest rates) and 59 home equity loans with total unpaid principal balances of $291,020,267 and $3,439,554, respectively. The HELOCs had a total current credit limit of $451,071,777 as of the Cut-Off Date (April 30, 2021).

DBRS Morningstar considers this transaction to be a seasoned performing HELOC securitization. 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 transaction includes a significantly seasoned first-lien portion and a slightly more seasoned junior-lien (predominantly second-lien) portion.

In this transaction, approximately 77.0% of the loans are open and temporarily closed HELOCs; 21.9% are closed HELOCs; and 1.2% are home equity mortgage loans. The open-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 up to the related credit limit, though such right to make draws may be temporarily frozen in certain circumstances. The HELOCs could be closed temporarily, preventing borrowers from making new draws. The temporary freeze of the credit line may happen for a few reasons, including, but not limited to, a decrease in value of the related mortgaged property, a material change in a borrower's financial circumstances, a default by the related borrower under the related line of credit agreement, or a change in delinquency status. Borrowers of closed HELOCs may no longer make draws, while open-HELOC mortgagors generally have a draw periods of 10 or 20 years and a repayment period at the end of the draw term of either 10, 15, or 20 years or are required to be repaid in full at the end of the draw period. During the repayment period, borrowers are no longer allowed to draw. Also, their monthly principal payments during the repayment period will equal an amount that allows the outstanding loan balance to evenly amortize down over the repayment term, except for 36.3% that have a balloon payment due at the end of the repayment period. Borrowers are generally required to make accrued and unpaid interest payments only during the draw period except in certain instances when the principal balance exceeds the credit limit.

Borrowers of less than 0.02% and approximately 0.57% of the loans (by loan count) opted to use a fixed-rate lock and fixed-rate option feature, respectively. A loan with a fixed-rate lock feature gives the borrower the ability to convert their HELOC into a closed, fixed-rate mortgage loan with a repayment period of 15 years. A HELOC with a fixed-rate option feature gives the borrower the ability to convert up to three segments of $5,000 or more to a fixed-rate segment, while retaining the ability to draw additional balances during the draw period up to the remaining credit limit.

The portfolio is approximately 116 months seasoned and contains 2.0% of modified loans. The modifications happened more than two years ago for 70.2% of the modified loans. Within the pool, 198 mortgages have non-interest-bearing deferred amounts totaling $332,676, which equates to approximately 0.1% of the total principal balance. There are no Home Affordable Modification Program (HAMP) or proprietary principal forgiveness amounts included in the deferred amounts.

Loan Funding Structure LLC is the Sponsor, and PMIT TRS II LLC is the Seller. PMIT Residential Funding VIII, LLC (the Depositor) will transfer the loans to the Trust. These loans were originated and previously serviced by various entities through purchases in the secondary market.

Rushmore Loan Management Services LLC will service the loans. The initial aggregate servicing fee for the BRAVO 2021-HE2 portfolio will be 0.50% per annum.

U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will serve as Indenture Trustee, Paying Agent, and Custodian. U.S. Bank Trust National Association will serve as the Owner Trustee.

The Sponsor or 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 SA, Class AIOS and Class R Notes) to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

Unlike in several other transactions backed by junior-lien mortgage loans and/or HELOCs, in this transaction, any junior-lien HELOC or loan that is 180 days delinquent under the Mortgage Bankers Association (MBA) delinquency method will not be charged off. Notwithstanding, DBRS Morningstar assumes no recoveries upon default of any junior liens in this pool in its analysis.

This transaction uses a structural mechanism similar to those used in other HELOC-backed transactions to fund future draw requests. The Servicer will be required to fund draws and will be entitled to reimburse itself for such draws prior to any payments on the Notes from the principal collections. If the aggregate draws exceed the principal collections (Net Draw), then the Paying Agent will reimburse the Servicer first from amounts on deposit in the variable-funding account (VFA) and second, if the amounts available in the VFA are insufficient, from the future principal collections. The VFA has an initial balance of $100,000 and a VFA required amount of $100,000 for each payment date. If the amount on deposit in the VFA is less than such required amount on a payment date, the Paying Agent will use excess cash flow to deposit in the VFA. To the extent the VFA is not funded up to its required amount from excess cash flow, the holder of the Trust Certificates on behalf of the Class R Notes will be required to use its own funds to make any deposits to the VFA or to reimburse the Servicer for any Net Draws. The holder of the Trust Certificate is permitted to finance these funding obligations by using the financing secured by the Trust Certificate with a third-party lender. The balance of Trust Certificates will be increased by an amount deposited to VFA account used to reimburse the Servicer for the Net Draws.

The transaction employs a modified sequential-pay cash flow structure with a pro rata principal distribution among the more senior tranches (Class A-1, A-2, and A-3 Notes) subject to a sequential priority trigger (Credit Event) as described further below. The Trust Certificates have a pro rata principal distribution with all senior and subordinate tranches while the Credit Event is not in effect. When the trigger is in effect, the Trust Certificates principal distribution will be subordinated to both the senior and subordinate notes in the payment waterfall. While a Credit Event is in effect, realized losses will be allocated reverse sequentially starting with the Trust Certificates, followed by the Class B-3 Notes, and then continuing up to Class A-1 Notes based on their respective payment priority. While a Credit Event is not in effect, the losses will be allocated pro rata between the Trust Certificates and all outstanding notes based on their respective priority of payments. The outstanding notes will allocate realized losses reverse sequentially, beginning with Class B-3 up to Class A-1 Notes.

There will be no advancing of delinquent principal or interest on the mortgages by the Servicer or any other party to the transaction; however, the Servicer is obligated to make advances for the first-lien loans in respect of homeowner association fees, taxes and insurance, as well as reasonable costs and expenses incurred in the course of servicing and disposing properties. The Servicer is also obligated to fund any monthly Net Draws, as noted above.

As of the Cut-Off Date, 99.5% of the pool was current and 0.3% was 30 days delinquent, under the MBA delinquency method. Additionally, 0.2% of the pool was in bankruptcy (all bankruptcy loans are performing or 30 days delinquent). Approximately 91.1% 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 (99.0%) is exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules. The loans subject to the ATR rules (1.0%) were missing a designation. HELOCs are not subject to the ATR/QM rules.

The holder of the Trust Certificates may, at its option, on or after the earlier of (1) the payment date in May 2024 or (2) the date on which the total loans' and real estate owned (REO) properties' balance falls to or below 30% of the loan balance as of the Cut-Off Date, purchase all of the loans and REO properties at the optional termination price described in the transaction documents.

The Depositor, at its option, may purchase any mortgage loan that is 90 days or more MBA delinquent under the MBA method (or in the case of any loan that has been subject to a Coronavirus Disease (COVID-19) pandemic-related forbearance plan, on any date from and after the date on which such loan becomes 90 days MBA delinquent following the end of the forbearance period) at the repurchase price described in the transaction documents. The total balance of such loans purchased by the Depositor will not exceed 10% of the Cut-Off balance.

The Servicer, at the direction of the Controlling Holder, may direct the Issuer to sell eligible nonperforming loans (NPLs; those 120 days or more MBA delinquent) or REO properties (both Eligible NPLs) to third parties individually or in bulk sales. The Controlling Holder will have a sole authority over the decision to sale the Eligible NPLs, as described in the transaction documents.

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.

Reperforming loans (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 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, DBRS Morningstar has seen increased delinquencies and loans on forbearance plans, and expects 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: March 2021 Update,” published on March 17, 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 less 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 the coronavirus pandemic. Within this pool, although not subject to the CARES Act, 6.6% of the borrowers are on or have been on coronavirus pandemic-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 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: March 2021 Update,” dated March 17, 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 (sf), BB (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 presale 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.

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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