DBRS Morningstar Finalizes Provisional Ratings on Verus Securitization Trust 2021-4

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgaged-Backed Notes, Series 2021-4 (the Notes) issued by Verus Securitization Trust 2021-4 (the Trust):

-- $334.2 million Class A-1 at AAA (sf)
-- $30.1 million Class A-2 at AA (sf)
-- $47.4 million Class A-3 at A (low) (sf)
-- $22.4 million Class M-1 at BBB (low) (sf)
-- $14.9 million Class B-1 at BB (low) (sf)
-- $10.7 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 28.40% of credit enhancement provided by subordinate notes. The AA (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (sf) ratings reflect 21.95%, 11.80%, 7.00%, 3.80%, and 1.50% of credit enhancement, respectively.

This securitization is a portfolio of primarily fixed- and adjustable-rate, expanded prime and nonprime, first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 751 mortgage loans with a total principal balance of $466,726,960 as of the Cut-Off Date (July 1, 2021).

Subsequent to the issuance of the related Presale Report, there were loans with minimal balance updates. The Notes are backed by 751 mortgage loans with a total principal balance of $466,921,392 in the Presale Report. Unless specified otherwise, all the statistics regarding the mortgage loans in this report are based on the Presale Report balance.

The top originator for the mortgage pool is Calculated Risk Analytics, LLC doing business as Excelerate Capital (Excelerate; 21.0%). The remaining originators each comprise less than 15.0% of the mortgage loans. The Servicers of the loans are Shellpoint Mortgage Servicing (88.7%), Fay Servicing, LLC (6.4%), and Specialized Loan Servicing (SLS; 4.9%).

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label non-agency prime jumbo products for various reasons. In accordance with the Qualified Mortgage (QM)/ATR rules, 65.1% of the loans are designated as non-QM, 1.2% are designated as QM Safe Harbor, and 0.6% are designated as QM Rebuttable Presumption. Approximately 33.2% 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 interest, representing at least 5% of the Notes 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 Payment Date occurring in July 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, the Administrator, at the Issuer’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. After such purchase, the Depositor must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) the proceeds to be distributed to the appropriate holders of regular or residual interests.

The P&I Advancing Party or Servicer (for 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 of properties.

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 Certificates sequentially (IIPP) 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.

Approximately 21.2% of the loans were originated under a Property Focused Investor Loan Debt Service Coverage Ratio (DSCR) program and 5.9% were originated under a Property Focused Investor Loan program. Both programs allow for property cash flow/rental income to qualify borrowers for income.

Coronavirus Impact
The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the pandemic, DBRS Morningstar saw an increase in delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief that may perform very differently from traditional delinquencies. At the onset of the pandemic, the option to forebear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low loan-to-value ratios, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months delinquencies have been gradually trending downwards, as forbearance periods come 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:

-- Robust loan attributes and pool composition.
-- Satisfactory third-party due-diligence review.
-- Improved underwriting standards.

The transaction also includes the following challenges:

-- Nonprime, non-QM, and investor loans.
-- The representations and warranties framework.
-- Three-month advances of delinquent P&I.
-- The P&I Advance Party’s financial capability.
-- No operational risk review of Excelerate Capital.
-- Borrowers on forbearance plans.

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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