DBRS Morningstar Finalizes Provisional Ratings on Imperial Fund Mortgage Trust 2022-NQM1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2022-NQM1 (the Certificates) issued by Imperial Fund Mortgage Trust 2022-NQM1 (the Trust):

-- $300.5 million Class A-1 at AAA (sf)
-- $34.2 million Class A-2 at AA (low) (sf)
-- $22.6 million Class A-3 at A (low) (sf)
-- $17.0 million Class M-1 at BBB (low) (sf)
-- $21.0 million Class B-1 at BB (low) (sf)
-- $12.5 million Class B-2 at B (low) (sf)

The AAA (sf) rating on the Class A-1 Certificates reflects 27.60% of credit enhancement provided by subordinated Certificates. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) ratings reflect 19.35%, 13.90%, 9.80%, 4.75%, and 1.75% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

This securitization is a portfolio of fixed-rate and adjustable-rate prime and non-prime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 912 loans with a total principal balance of approximately $415,064,721 as of the Cut-Off Date (January 1, 2022).

The originators for the mortgage pool are A&D Mortgage LLC (ADM; 99.1%) and others (0.9%). ADM originated the mortgages primarily under the following five programs:
-- Super Prime
-- Prime
-- DSCR
-- Foreign National – Full Doc
-- Foreign National – DSCR

ADM is the Servicer for all loans. Unlike its prior securitizations where the loans were subserviced by another servicer, this is the first transaction in which ADM will service the loans on its own. BSI Financial Services (BSI) will act as a Backup Servicer for all mortgage loans in this transaction. BSI will become the Servicer after the servicing is transferred from ADM to BSI. The servicing transfer will occur within 30 days of termination of ADM if ADM fails to deposit the required payment amounts, fund the delinquent principal and interest (P&I) advances, observe or perform the Servicer's duties, or experiences other unremedied events of default described in detail in the transaction documents.

Imperial Fund II, LLC (Imperial Fund) will act as the Sponsor and Servicing Administrator and Nationstar Mortgage LLC (Nationstar) will act as the Master Servicer. Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) will act as the Securities Administrator and Certificate Registrar. Wilmington Trust National Association (rated AA (low) with a Negative trend by DBRS Morningstar) will serve as the Custodian and Wilmington Savings Fund Society, FSB will act as the Trustee.

In accordance with U.S. credit risk retention requirements, Imperial Fund as the Sponsor, either directly or through a Majority-Owned Affiliate, will retain an eligible horizontal residual interest consisting of the Class B-3 and Class X Certificates and the requisite amount of the Class B-2 Certificates, representing not less than 5% economic interest in the transaction, to satisfy the requirements under Section 15G of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.

Although the applicable mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ability-to-repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime products for various reasons described above. In accordance with the CFPB Qualified Mortgage (QM)/ATR rules, 60.0% of the loans are designated as non-QM. Approximately 40.0% of the loans are made to investors for business purposes and are thus not subject to the QM/ATR rules.

The Servicer will generally fund advances of delinquent P&I on any mortgage until such loan becomes 90 days delinquent, contingent upon recoverability determination. The Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties. If the Servicer fails in its obligation to make P&I advances, Nationstar, as the Master Servicer, will be obligated to fund such advances. In addition, if the Master Servicer fails in its obligation to make P&I advances, Citibank, N.A., as the Securities Administrator, will be obligated to fund such advances.

ADM will have the option, but not the obligation, to repurchase any nonliquidated mortgage loan that is 90 or more days delinquent under the Mortgage Bankers Association (MBA) method (or, in the case of any Coronavirus Disease (COVID-19) forbearance loan, such mortgage loan becomes 90 or more days MBA Delinquent after the related forbearance period ends) at the Repurchase Price, provided that such repurchases in aggregate do not exceed 7.5% of the total principal balance as of the Cut-Off Date.

On or after the payment date in January 2025, Imperial Fund II Mortgage Depositor LLC (the Depositor) has the option to purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such a purchase, the Depositor then 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.

On any date following the date on which the collateral pool balance is less than or equal to 10% of the Cut-Off Date balance, the Servicing Administrator and the Servicer will have the option to terminate the transaction by purchasing all of the mortgage loans and any real estate owned (REO) property at a price equal to the sum of the aggregate stated principal balance of the mortgage loans (other than any REO property) plus applicable accrued interest thereon, the lesser of the fair market value of any REO property and the stated principal balance of the related loan, and any outstanding and unreimbursed advances, accrued and unpaid fees, and expenses that are payable or reimbursable to the transaction parties (Optional Termination). An Optional Termination is conducted as a qualified liquidation.

The transaction employs a sequential-pay cash flow structure. Principal proceeds can be used to cover interest shortfalls on the Notes, but such shortfalls on Class A-3 and more subordinate bonds will not be paid from principal proceeds until the more senior classes are retired. Principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 Notes before being applied sequentially to amortize the balances of the Notes. Furthermore, the 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 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 forbearances, which are generally short-term payment reliefs that may perform very differently from traditional delinquencies. Because the option to forbear mortgage payments was so widely available at the onset of the pandemic, it drove forbearances to a very high level. When the dust settled, coronavirus-induced forbearances 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.

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

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns December 2021 Update,” dated December 9, 2021.

The ratings reflect transactional strengths that include the following:
-- Substantial borrower equity, robust loan attributes, and pool composition;
-- Compliance with the ATR rules;
-- Satisfactory third-party due-diligence review;
-- Current loans; and
-- Improved underwriting standards.

The transaction also includes the following challenges:
-- Nonprime, non-QM, and investor loans;
-- Three-month advances of delinquent P&I;
-- Representations and warranties framework;
-- Servicers’ financial capability; and
-- A Servicer with the Limited Performance History

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482 .

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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