DBRS Morningstar Finalizes Provisional Ratings on Deephaven Residential Mortgage Trust 2022-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Notes, Series 2022-3 (the Notes) issued by Deephaven Residential Mortgage Trust 2022-3 (DRMT 2022-3 or the Issuer):

-- $128.8 million Class A-1 at AAA (sf)
-- $18.4 million Class A-2 at AA (sf)
-- $28.0 million Class A-3 at A (sf)
-- $15.4 million Class M-1 at BBB (sf)
-- $12.5 million Class B-1 at BB (sf)
-- $12.3 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 42.75% of credit enhancement provided by subordinated Notes. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 34.55%, 22.10%, 15.25%, 9.70%, and 4.25% of credit enhancement, respectively.

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

DRMT 2022-3 is backed by 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 421 loans with a total principal balance of approximately $224,978,650 as of the Cut-Off Date (June 1, 2022).

The originators for the mortgage pool are Deephaven Mortgage LLC (Deephaven; 32.3%); All Credit Considered Mortgage, Inc. (ACC; 12.9%); 5th Street Capital, Inc. (5th Street; 10.2%); and others (44.6%). Deephaven acquired loans originated predominantly under following underwriting guidelines:

-- Deephaven Expanded Prime
-- Deephaven Non-Prime
-- Deephaven Debt Service Coverage Ratio
-- ACC prime plus

DBRS Morningstar performed a telephone operational risk review of Deephaven's aggregation and mortgage loan origination practices and believes the company is an acceptable mortgage loan aggregator and originator.

Selene Finance LP (98.7%) and NewRez LLC doing business as Shellpoint Mortgage Servicing (1.3%) are the Servicers for all loans. RCF II Loan Acquisition, LP will act as the Sponsor and Advance Reimbursement Party. Computershare Trust Company, N.A. (rated BBB with a Stable trend by DBRS Morningstar) will act as the Master Servicer, Paying Agent, Note Registrar, Certificate Registrar, and REMIC Administrator. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will serve as the Custodian; Wilmington Savings Fund Society, FSB will act as the Owner Trustee; and Wilmington Trust National Association (rated AA (low) with a Stable trend by DBRS Morningstar) will act as the Indenture Trustee.

The pool is about three months seasoned on a weighted-average (WA) basis, although seasoning spans from zero to 10 months.

In accordance with U.S. credit risk retention requirements, RCF II Loan Acquisition, LP as the Sponsor, either directly or through a Majority-Owned Affiliate, will retain an eligible horizontal residual interest consisting of a portion of the Class B-2 Notes, 100% of the Class B-3 Notes, and the Class XS Notes 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, 67.3% of the loans are designated as non-QM. Approximately 32.7% of the loans are made to investors for business purposes and are thus not subject to the QM/ATR rules.

The Servicers will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 180 days delinquent, contingent upon recoverability determination. Each 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 (Servicing Advances). The Servicers will not advance P&I for the payments forborne on the loans where the borrower has been granted forbearance or similar loss mitigation in response to the Coronavirus Disease (COVID-19) pandemic or otherwise. However, the Servicers will be required to make P&I advances for any delinquent payments due after the end of the related forbearance period. If the applicable Servicer fails to make a required P&I advance, the Master Servicer will fund such P&I advance until it is deemed unrecoverable.

The Sponsor 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 method at the Repurchase Price, provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

RCF II Master Depositor, LLC, as the Administrator, on behalf of the Issuer may, at its option, on any date on or after the earlier of (1) the three-year anniversary of the Closing Date or (2) the date on which the loan balance is reduced to less than or equal to 30% of the balance as of the Cut-Off date, redeem the Notes at a redemption price equal to the greater of the (A) outstanding Notes balance plus accrued and unpaid interest and (B) the sum of the loan balance, real estate owned property value less expected liquidation expense, advances, and unpaid fees and expenses, as discussed in the transaction documents (Optional Redemption).

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the Class A-1, A-2, and A-3 Notes (Senior Classes) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Credit 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 bonds after a Credit Event has occurred. 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 will be available to cover interest shortfalls only after the more senior classes have been paid off in full. 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 to Class A-3. Of note, the interest and principal otherwise available to pay the Class B-3 Notes interest and interest shortfalls may be used to pay the Senior Classes' cap carryover amounts after the coupons on Senior Classes step up by 100 basis points on and after the payment date in July 2026.

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. 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 forbear 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, 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 any 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 June 2022 Update,” dated June 29, 2022.

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, investor loans and loans to individual tax identification number residents;
-- Six-month advances of delinquent P&I;
-- Representations and warranties framework; and
-- Servicers’ financial capability.

The full description of the strengths, challenges, and mitigating factors is detailed in the related report.

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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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