DBRS Morningstar Upgrades the Ratings of NRZ MSR-Collateralized Notes, Series 2018-FNT1 and 2018-FNT2, Trend Stable

DBRS, Inc. (DBRS Morningstar) has upgraded the ratings of NRZ MSR-Collateralized Notes, Series 2018-FNT1 and NRZ MSR-Collateralized Notes, Series 2018-FNT2 (the Notes) issued jointly by New Residential Mortgage LLC and MSR WAC LLC. The trend on all ratings is Stable. Concurrently, the ratings have been removed from Under Review with Positive Implications, where they were placed on April 22, 2021, following the announcement that the Company had entered into a definitive agreement to acquire Caliber Home Loans, Inc (Caliber) for approximately $1.675 billion in cash.

KEY RATING CONSIDERATIONS
The ratings action reflects DBRS Morningstar’s upgrade of the Long-Term Issuer Rating of New Residential Investment Corp. and those of its subsidiaries, New Residential Mortgage LLC and MSR WAC LLC to BB (low) from B (high) (please see the DBRS Morningstar press release: DBRS Morningstar Upgrades New Residential Investment Corp. to BB (low), Trend Stable, October 5, 2021, for further information).

Given that the ratings of the Notes benefit from a guarantee provided by the Company and the ultimate recourse to NRZ, the ratings of the Notes are inherently linked to that of NRZ, and will move in tandem with the Long-Term Issuer Rating of NRZ. However, this movement in tandem with NRZ’s rating is predicated on the expected recovery on the Notes from the MSR assets remaining consistent with that, which is supportive of the current notch uplift from the Long-Term Issuer Rating of NRZ. The Notes benefit from a first priority, perfected security interest on specific pools of agency mortgage servicing rights (MSRs). The number of notches of uplift is a function of DBRS Morningstar’s expected recovery for noteholders from the liquidation of the MSR assets upon the occurrence of a credit event and the priority claim on those liquidation proceeds to the more senior class of notes. In other words, DBRS Morningstar gives considerations to the level of seniority and overcollateralization of each class of MSR notes when assigning the uplift from the Issuer Rating.

On June 30, 2021, there was $362.3 million of note principal outstanding across the seven classes of notes. The Notes are collateralized by the aggregate excess servicing fees and by any float and any real estate (REO) owned fees received by the Issuers under their agreements with the servicers relating to such MSRs on a certain pool of private-label residential mortgages. On June 30, 2021, the fair value of the MSR assets as set by the third-party Valuation Agent was $516.5 million. This resulted in a sound level of overcollateralization and a LTV for the transaction of 70.15%.

DBRS Morningstar’s recovery analysis for the Notes assumes that an Event of Default has occurred and that the Sequential Pay Trigger Event is in effect, resulting in principal payment on the notes to be paid sequentially to the most senior class of notes, then outstanding until the notes are repaid in full. Three scenarios were developed by DBRS Morningstar that included haircuts to the June 30, 2021 fair values of the MSR collateral, with ranges from 40% to 60%. A uniform distribution of these scenarios was assumed. The results of these scenarios were then averaged to determine a final expected recovery for each class of the Notes. The recoveries led to uplift of four notches from the Long-Term Issuer Rating for the three most senior classes of the Notes, a two notch uplift for the Class D Notes and no rating uplift for the Class E, F, and G Notes. DBRS Morningstar also conducted a sensitivity analysis to the distribution of weightings of the three scenarios and found no material impact to the notching uplift.

RATING DRIVERS
Given that the ratings of the Notes are inherently linked to the Long-Term Issuer Rating of NRZ, should NRZ’s Long-Term Issuer Rating be upgraded, the rating of the Notes would be upgraded. An improvement in the expected recovery from the MSR assets for the lower class notes would lead to a wider uplift of the ratings of the lower class notes from the Long-Term Issuer Rating of NRZ. Conversely, given that the ratings of the Notes are inherently linked to the Long-Term Issuer Rating of NRZ, should NRZ’s Long-Term Issuer Rating be downgraded, the rating of the Notes would be downgraded. Additionally, a decline in the expected recovery on the Notes from the MSR assets would result in the rating uplift from the Long-Term Issuer Rating to narrow.

RATING RATIONALE
Credit Profile of the Servicer and Operational Risk
When cash flows to MSR noteholders have linkage to the servicer, the credit risk profile of the servicer is a key consideration, along with the collateral valuation. DBRS Morningstar performed an operational risk review to assess the quality of the servicer’s operations and its ability to comply with servicing standards.

Acknowledgment Agreement Review
DBRS Morningstar reviewed the Acknowledgment Agreement (AA) and considered the terms of the AA as it relates to each party, its legal enforceability, the circumstances under which the Agency can extinguish the secured party’s lien on the MSR and the specific rights given to the secured party for the benefit of the noteholders, including, but not limited to, whether the Agency permits (1) the secured party to initiate the transfer of servicing to a successor servicer if the current servicer defaults, (2) the servicing transfer to occur without full assumption of representations and warranties by the successor servicer and (3) a servicer termination by the Agency with or without cause.

Collateral Valuation
Through qualitative analysis, DBRS Morningstar assessed the reasonableness of the third-party estimate of the collateral value. DBRS Morningstar RMBS analysts reviewed the valuation agent’s logic or analytical approach employed to derive the net present value (NPV) of the MSR and ESF cash flows, as well as the critical assumptions used as inputs to the valuation cash flow model. The key inputs used in the valuation of MSRs by the valuation agent include the contractual gross servicing fee; ancillary income (late fees, float and escrows); remaining mortgage portfolio maturity; interest rates; involuntary and voluntary mortgage prepayment speeds; the cost of servicing the mortgage loans; and the discount rate applied to the cash flows to derive the NPV of the MSRs.

DBRS Morningstar expects the collateral valuation to be performed by an independent third party and to be updated frequently given the impact interest rate movements may have on prepayments (there are no restrictions or penalties when prepaying Agency mortgage loans) and related MSR values. DBRS Morningstar expects collateral valuation reports to be provided on a periodic basis and monitors changes in collateral valuations, noteholder credit enhancement and, as applicable, compliance with covenants and advance rates, as well as other important aspects of the transaction agreements.

When estimating recovery values, DBRS Morningstar applied a haircut to the MSR fair market valuation. In general, a facility with lower advance rates will create more overcollateralization for noteholders, potentially generating higher DBRS Morningstar recovery rates, which may translate into a greater uplift (e.g., more notches) from the Long-Term Issuer Rating.

ESG CONSIDERATIONS
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. dollar unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 2, 2021): https://www.dbrsmorningstar.com/research/383936/global-methodology-for-rating-non-bank-financial-institutions. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021): https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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