DBRS Morningstar Finalizes Provisional Ratings on PRKCM 2021-AFC1 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2021-AFC1 (the Notes) issued by PRKCM 2021-AFC1 Trust (the Trust):

-- $248.6 million Class A-1 at AAA (sf)
-- $17.0 million Class A-2 at AA (sf)
-- $16.3 million Class A-3 at A (sf)
-- $13.9 million Class M-1 at BBB (low) (sf)
-- $7.7 million Class B-1 at BB (low) (sf)
-- $4.2 million Class B-2 at B (low) (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 19.70% of credit enhancement provided by subordinated Notes. The AA (sf), A (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) ratings reflect 14.20%, 8.95%, 4.45%, 1.95%, and 0.60% 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 fixed- and adjustable-rate expanded prime and nonprime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 640 loans with a total principal balance of $309,592,520 as of the Cut-Off Date (September 1, 2021).

AmWest Funding Corp. (AmWest) is the Originator and Servicer for the mortgage pool. DBRS Morningstar conducted a review of AmWest’s origination and servicing platform and believes the company is an acceptable mortgage loan originator and servicer.

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 60.3% of the loans are designated as non-QM.

Approximately 39.7% 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 16.8% of the loans, and mortgagor’s credit profile and debt-to-income ratio, property value, and the available assets, where applicable, for approximately 22.9% of the loans. Since the loans were made to investors for business purposes, they are exempt from the CFPB ATR rules and Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule.

For investor loans originated to investors under debt service coverage ratio (DSCR) programs (16.8% of the pool), lenders use property-level 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 (P&I) until loans become 180 days delinquent or are otherwise deemed unrecoverable. If the Servicer fails in its obligation to make P&I advances, Nationstar Mortgage LLC, as the Master Servicer, will be obligated to fund such advances. Also, if the Master Servicer fails in its obligation to make P&I advances, Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) as the Paying Agent will be obligated to fund such advances. 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 of properties.

The Sponsor, directly or indirectly through a majority-owned affiliate, is expected to retain an eligible horizontal residual interest consisting of the Class XS Notes, representing at least 5% of the fair value 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 distribution date in September 2024 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 20% of the Cut-Off Date balance, the Sponsor may terminate the Issuer (Optional Termination) by purchasing the loans, any real estate owned properties, and any other property remaining in the Issuer at the optional termination price, specified in the transaction documents. After such a purchase, the Sponsor has the option to complete a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds to the appropriate holders of regular or residual interests.

The Controlling Holder in the transaction is a majority holder (or majority holders if there is no single majority holder) of the outstanding Class XS Notes, initially, the Seller. The Controlling Holder 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 Notes (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated notes. 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 Notes 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. Shortly after the onset of the coronavirus, DBRS Morningstar saw an increase in the 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 coronavirus, 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 downward as forbearance periods come to an end for many borrowers.

As of the Cut-Off Date, there are no loans that are subject to an active coronavirus-related forbearance plan with the Servicer.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns,” dated September 8, 2021.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards;
-- Substantial borrower equity, robust loan attributes, and pool composition;
-- Compliance with the ATR rules; and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Alternative documentation loans and loans to self-employed borrowers;
-- Nonprime, non-QM, and investor loans;
-- Representations and warranties framework;
-- Servicers’ financial capability; and
-- Six-month advances of delinquent P&I.

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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