DBRS Morningstar Assigns Provisional Ratings to Starwood Mortgage Residential Trust 2021-3

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the Mortgage Pass-Through Certificates, Series 2021-3 (the Certificates) to be issued by Starwood Mortgage Residential Trust 2021-3 (STAR 2021-3 or the Trust):

-- $239.2 million Class A-1 at AAA (sf)
-- $24.6 million Class A-2 at AA (low) (sf)
-- $18.1 million Class A-3 at A (sf)
-- $15.1 million Class M-1 at BBB (sf)
-- $10.2 million Class B-1 at BB (sf)
-- $6.0 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 24.60% of credit enhancement provided by subordinate notes. The AA (low) (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 16.85%, 11.15%, 6.40%, 3.20%, and 1.30% of credit enhancement, respectively.

This securitization consists of a portfolio of fixed- and adjustable-rate, expanded prime and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 338 mortgage loans with a total principal balance of $317,239,423 as of the Cut-Off Date (June 1, 2021).

The originators for the mortgage pool are Luxury Mortgage Corp. (Luxury Mortgage; 68.5%), HomeBridge Financial Services, Inc. (Homebridge; 21.9%), and other originators that each comprise less than 10% of the mortgage pool. The Servicer of the loans is Select Portfolio Servicing, Inc. DBRS Morningstar conducted a review of Starwood's residential mortgage platform and believes the company is an acceptable mortgage loan aggregator. However, DBRS Morningstar has not performed an operational risk review on Luxury Mortgage and Homebridge.

The proposed pool is about four months seasoned on a weighted average basis, although seasoning may span from one up to 61 months. All loans in the pool are current as of the Cut-Off Date. Approximately 5.9% of the pool have missed at least one payment in the past 24 months. The rest of the loans (94.1% of the pool) have been current over the same period.

All acquired mortgage loans are underwritten and funded by the originators on a delegated basis pursuant to either Starwood proprietary guidelines or approved originator underwriting guidelines.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) and Ability-to-Repay (ATR) rules where applicable, 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 QM/ATR rules, approximately 72.7% of the loans are designated as non-QM.

Approximately 27.2% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules. The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on the property-level cash flows for approximately 16.9% of the loans, and mortgagor’s credit profile and debt-to-income ratio, property value, and the available assets, where applicable, for approximately 9.8% of the loans. Since the loans were made to investors for business purposes, they are exempt from the CFPB ATR rules and TILA/RESPA Integrated Disclosure rule.

For investor loans originated to investors under debt service coverage ratio (DSCR) programs (16.9% of the pool), lenders use property cash flow or the DSCR to qualify borrowers for income. The DSCR is typically calculated as market rental value (validated by an appraisal report) divided by the principal, interest, taxes, insurance, and association dues.

For this transaction, the Servicer will fund advances of delinquent principal and interest until loans become 180 days delinquent or are otherwise deemed unrecoverable. Additionally, the Servicer is obligated to make advances with respect to taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.

The Sponsor, directly or indirectly through a majority-owned affiliate, is expected to retain an eligible horizontal residual interest consisting of a portion of the Class B-3 Certificates and all of the Class XS Certificates, representing at least 5% of the Certificates, 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 in June 2024 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, Starwood Non-Agency Securities Holdings, LLC as Optional Redemption Holder may redeem all outstanding Certificates (Optional Redemption) at a price equal to the greater of (a) unpaid balances of the mortgage loans plus accrued, unpaid interest, and the fair market value of all real estate-owned (REO) properties as well as deferred amounts (excluding the forbearance Amounts as of the Cut-Off Date) and (b) the sum of the remaining aggregate balance of the Certificates plus accrued and unpaid interest, and any fees, expenses, and indemnity payments due and unpaid to the transaction parties, including any unreimbursed servicing advances (Optional Redemption Price). The Optional Redemption Holder is an entity designated by the Depositor and a 50% affiliate of the Depositor.

Additionally, if on any date on which the unpaid mortgage loan balance and the value of REO properties has declined to less than 8% of the initial mortgage loan balance as of the Cut-Off Date, the Master Servicer will also have the right to purchase at the Optional Clean-Up Call Price all of the mortgages, REO properties, and any other properties from the Issuer. However, following receipt of notice of the Master Servicer’s intent to exercise the Optional Clean-Up Call, the Servicing Administrator will have 30 days to exercise an Optional Redemption.

The Seller (SMRF TRS LLC) will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent under the Mortgage Bankers Association (MBA) Method (or in the case of any mortgage loan that has been subject to a forbearance plan related to the impact of the Coronavirus Disease (COVID-19) pandemic, on any date from and after the date on which such loan becomes more than 90 days delinquent under the MBA Method from the end of the forbearance period) at the repurchase price (par plus interest), provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date (excluding any loan repurchased by the Seller related to a breach of a representation and warranty).

The transaction's cash flow structure is similar to that of other non-QM securitizations. The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (a Trigger Event). Principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 Certificates (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated certificates. For the Class A-3 Notes (only after a Credit Event) and for the mezzanine and subordinate classes of notes (both before and after a Credit Event), principal proceeds can be used to cover interest shortfalls as the more senior Certificates are paid in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to Class B-2.

CORONAVIRUS IMPACT
The coronavirus pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar saw increases in delinquencies for many residential mortgage-backed securities (RMBS) asset classes, shortly after the onset of the pandemic.

Such mortgage delinquencies were mostly in the form of forbearance, which are generally short-term payment reliefs that may perform very differently from traditional delinquencies. At the onset of the pandemic, the option to forebear mortgage payments was so widely available, driving forbearance to a very high level. When the dust settled, coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low loan-to-value ratios, and good underwriting in the mortgage market in general. Across nearly all RMBS asset classes, delinquencies have been gradually trending down in recent months as the forbearance period comes to an end for many borrowers.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: June 2021 Update,” published on June 18, 2021), DBRS Morningstar may assume higher loss expectations for pools with loans on forbearance plans.

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: June 2021 Update,” dated June 18, 2021.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards
-- Robust loan attributes and pool composition
-- Strong servicer
-- Compliance with the ATR Rules
-- Satisfactory third-party due-diligence review

The transaction also includes the following challenges:

-- Investor loans
-- Borrowers on forbearance plans.
-- Nonprime, non-QM, and investor loans.
-- Bank statement loans to self-employed borrowers
-- The representations and warranties framework.
-- Servicer advances of delinquent principal and interest

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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