DBRS Morningstar Finalizes Provisional Ratings on Verus Securitization Trust 2021-R3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2021-R3 (the Notes) issued by Verus Securitization Trust 2021-R3 (the Trust):

-- $325.6 million Class A-1 at AAA (sf)
-- $28.1 million Class A-2 at AA (sf)
-- $41.2 million Class A-3 at A (sf)
-- $25.9 million Class M-1 at BBB (low) (sf)
-- $14.2 million Class B-1 at BB (sf)
-- $12.2 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 27.70% of credit enhancement provided by subordinate notes. The AA (sf), A (sf), BBB (low) (sf), BB (sf), and B (sf) ratings reflect 21.45%, 12.30%, 6.55%, 3.40%, and 0.70% of credit enhancement, respectively.

This securitization is a portfolio of fixed- and adjustable-rate, expanded prime and nonprime, first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 1,173 mortgage loans with a total principal balance of $450,394,262 as of the Cut-Off Date (May 1, 2021).

Subsequent to the issuance of the related Presale Report, there were minimal loan drops and balance updates. The Notes are backed by 1,187 mortgage loans with a total principal balance of $456,322,141 in the Presale Report. Unless specified otherwise, all the statistics regarding the mortgage loans in the related report are based on the Presale Report balance.

The mortgage pool consists primarily of loans from collapsed previously issued Verus transactions.

The loans are on average more seasoned than a typical new origination non-Qualified Mortgage (non-QM) securitization. The DBRS Morningstar calculated weighted-average loan age is 29 months, and all of the loans are seasoned 24 months or more. Within the pool, 97.0% of the loans are current, 2.2% are 30 days delinquent, and 0.8% are 60 days or more delinquent. All loans that remain 60 days or more delinquent on the closing date will be removed from the pool. The Coronavirus Disease (COVID-19)-affected loans account for 34.8% of the pool and are described in further detail below.

The originators for the mortgage pool are Sprout Mortgage (21.2%) and other originators, each comprising less than 10.0% of the mortgage loans. The Servicers of the loans are Shellpoint Mortgage Servicing (79.1%) and Specialized Loan Servicing LLC (SLS; 20.9%).

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the Qualified Mortgage (QM)/ATR rules, 46.7% of the loans are designated as non-QM and one loan is designated as QM rebuttable presumption. Approximately 53.3% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

The sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical residual interest consisting of not less than 5% of each Note, to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On or after the earlier of (1) the Distribution Date occurring in May 2023 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, the Paying Agent, at the Controlling Holder's option, may redeem all of the outstanding Notes at a price equal to the greater of (A) the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts and (B) the class balances of the related Notes less than 90 days delinquent with accrued unpaid interest plus fair market value of the loans 90 days or more delinquent and real estate owned properties (Optional Redemption Price). After such purchase, the Paying Agent must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

If the Sponsor (or an affiliate) is not the Controlling Holder and there is more than one Class XS Noteholder, a Third-Party Auction may be requested. The Third-Party Auction Bid must equal or exceed the Optional Redemption Price for the qualified liquidation to take place.

The P&I Advancing Party or servicer in the case of loans serviced by SLS will fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent. The P&I Advancing Party or servicer has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. The Servicers, however, are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties. The three-month advancing mechanism may increase the probability of periodic interest shortfalls in the current economic environment affected by the coronavirus pandemic. As borrowers may seek forbearance on their mortgages in the coming months, P&I collections may be reduced meaningfully.

This transaction incorporates a sequential-pay cash flow structure with a pro rata feature among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 Notes sequentially after a Trigger Event. For more subordinated Notes, principal proceeds can be used to cover interest shortfalls as the more senior Notes 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-2.

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's 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 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 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: March 2021 Update,” published on March 17, 2021), 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 pandemic 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 ratio (LTV) 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 (CARES) Act, signed into law on March 27, 2020, 34.8% (as of May 1, 2021) of the borrowers had been granted forbearance or deferral plans because of financial hardship related to the coronavirus pandemic. These forbearance plans allow temporary payment holidays, followed by repayment once the forbearance period ends. The Servicers, in collaboration with the Servicing Administrator, are generally offering 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 for other loss mitigation options. Prior to the end of the applicable forbearance period, the Servicers will contact each related borrower to identify the options available to address related forborne payment amounts. As a result, the Servicers, in conjunction with or at the direction of the Servicing Administrator, may offer a repayment plan or other forms of payment relief, such as deferral of the unpaid P&I amounts or a loan modification, in addition to pursuing other loss mitigation options.

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.

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: December Update,” dated December 2, 2020.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition.
-- Faster prepayments across non-QM.
-- Improved underwriting standards.
-- Compliance with the ATR rules.
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Borrowers on forbearance plans.
-- Three-month advances of delinquent P&I.
-- The representations and warranties framework.
-- Nonprime, non-QM, and investor loans.
-- The P&I advance party’s financial capability.

The full description of the strengths, challenges, and mitigating factors is detailed in the related 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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