DBRS Morningstar Finalizes Provisional Ratings on RUN 2022-NQM1 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2022-NQM1 (the Notes) issued by RUN 2022-NQM1 Trust (the Issuer):

-- $237.5 million Class A-1 at AAA (sf)
-- $22.5 million Class A-2 at AA (high) (sf)
-- $17.7 million Class A-3 at A (high) (sf)
-- $18.9 million Class M-1 at BBB (sf)
-- $10.1 million Class B-1 at BB (high) (sf)
-- $12.8 million Class B-2 at B (high) (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 28.35% of credit enhancement provided by subordinate notes. The AA (high) (sf), A (high) (sf), BBB (sf), BB (high) (sf), and B (high) (sf) ratings reflect 21.55%, 16.20%, 10.50%, 7.45%, and 3.60% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime and nonprime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 525 loans with a total principal balance of approximately $331,490,127, as of the Cut-Off Date (March 1, 2022).

RUN 2022-MQM1 represents the first rated mortgage loan securitization issued by the Sponsor, RUN 2022-NQM1 Sponsor, LLC, from the RUN shelf. The Sponsor is a special-purpose entity affiliated with Marathon Asset Management (Marathon), a global credit manager with approximately $23 billion of assets under management, as of September 30, 2021, and its managed accounts and Long Run Partners LLC, an aggregator of mortgage loans funded by Marathon.

The top originator for the mortgage pool is Oaktree Funding Corp. (65.2%). The remaining originators each comprise less than 15.0% of the mortgage loans. Select Portfolio Servicing, Inc. is the servicer for all the loans in the pool. As of the Cut-Off Date, approximately 20.3% of the loans in the pool were serviced by an interim servicer and are scheduled to transfer to the Servicer on or before April 1, 2022.

The pool is about three months seasoned on a weighted-average (WA) basis, although seasoning may span from zero to eight months. All loans were current as of the Cut-Off Date. Also, most loans (99.5% of the pool) have been always performing since origination.

In accordance with the Consumer Financial Protection Bureau (CFPB) Qualified Mortgage (QM) rules, 55.8% of the loans by balance are designated as non-QM. Approximately 44.2% of the loans in the pool were made to investors for business purposes and are exempt from the CFPB Ability-to-Repay (ATR) and QM rules.

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. Of note, the Servicer will make P&I Advances with respect to any loan where the borrower has been granted forbearance (or a similar loss mitigation action) as a result of the Coronavirus Disease (COVID-19) pandemic or otherwise (to the extent that such P&I advance amounts are deemed recoverable). 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 or a majority-owned affiliate of the Sponsor will acquire and retain an eligible horizontal interest in the Issuer consisting of a portion of the Class B-2, Class B-3, and Class XS Notes in the amount of not less than 5.0% of the aggregate 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. Such retention aligns the Sponsor’s and investor’s interest in the capital structure. Additionally, it is expected the Sponsor will initially own the remaining portion of the Class B-2 Notes, a portion of the Class B-1 Notes, and the entire Class A-IO-S Notes.

The Depositor may, at its option, on or after the earlier of (1) the payment date occurring in March 2025 or (2) the date on which the total loans' and real estate owned (REO) properties' balance falls to or below 30% of the loan balance as of the Cut-Off Date, purchase all of the loans and REO properties at the optional termination price described in the transaction documents (Optional Redemption).

The Controlling Holder (the majority holder or holders of the Class XS Notes; initially, the Sponsor), at its option, may purchase any mortgage loan that is 90 days or more delinquent under the Mortgage Banker Association (MBA) method (or in the case of any loan that has been subject to a pandemic-related forbearance plan, on any date from and after the date on which such loan becomes 90 days MBA delinquent following the end of the forbearance period) at the repurchase price (Optional Purchase Price) described in the transaction documents. The total balance of such loans purchased by the Depositor will not exceed 10% of the Cut-Off Date balance.

The transaction employs a sequential-pay cash flow structure. 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 and for the mezzanine and subordinate classes of notes, principal proceeds will be available to cover interest shortfalls only after the more senior notes have been paid off in full.

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 coronavirus.

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 coronavirus, because the option to forbear mortgage payments was so widely available, it drove 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 forbearance periods come to an end for many borrowers.

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 March 2022 Update,” dated March 24, 2022.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition,
-- Compliance with the ATR rules,
-- Improved underwriting standards,
-- Current loan status, and
-- Certain aspects of third-party due-diligence reviews.

The transaction also includes the following challenges:

-- Certain nonprime, non-QM, and investor loans,
-- Limited servicer advances of delinquent P&I, and
-- The representations and warranties standard.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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