DBRS Morningstar Assigns Provisional Ratings to Arroyo Mortgage Trust 2022-2

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the Mortgage-Backed Notes, Series 2022-2 to be issued by Arroyo Mortgage Trust 2022-2 (the Trust) as follows:

-- $281.1 million Class A-1 at AAA (sf)
-- $23.9 million Class A-2 at AA (sf)
-- $29.2 million Class A-3 at A (sf)
-- $17.7 million Class M-1 at BBB (sf)
-- $12.7 million Class B-1 at BB (sf)
-- $9.3 million Class B-2 at B (sf)

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

The AAA (sf) ratings on the Class A-1 Notes reflect 30.10% of credit enhancement provided by subordinate notes. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 24.15%, 16.90%, 12.50%, 9.35%, and 7.05% of credit enhancement, respectively.

This is a securitization of a portfolio of fixed- and adjustable-rate expanded prime first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 1,055 mortgage loans with a total principal balance of $402,152,867 as of the Cut-Off Date (June 1, 2022).

This transaction represents the eighth securitization by the Seller (Western Asset Mortgage Capital Corporation) or an affiliate since 2018. The originators for the mortgage pool are AmWest Funding Corp. (AmWest; 74.6%), Metro City Bank (MCB; 23.1%), and CTBC Bank Corp. ( 2.3%). The servicers for the mortgage pool are AmWest (74.6%), MCB (23.1%), and Specialized Loan Servicing LLC ( 2.3%).

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) rules, 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 Qualified Mortgage (QM)/ATR rules, approximately 57.0% of the loans are designated as non-QM. The remaining approximately 43.0% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

For this transaction, each servicer will fund advances of delinquent principal and interest (P&I) until loans become 180 days delinquent or are otherwise deemed unrecoverable. Additionally, each 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 through a wholly owned affiliate, is expected to retain an eligible horizontal residual interest consisting of the Class B-1, B-2, B-3, A-IO-S, and XS Notes, collectively 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 (1) the three-year anniversary of the Closing Date or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to less than or equal to 30% of the Cut-Off Date balance, the Administrator, on behalf of the Issuer, may redeem the Notes (Optional Redemption) at the redemption price (par plus interest).

The Seller 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 method 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.

The Issuer can redeem the Notes in whole but not in part at the tax redemption price (par plus interest) following a tax event as described in the transaction documents (Tax Redemption).

The transaction employs a sequential-pay cash flow structure with a pro rata principal payment among the Class A-1, A-2, and A-3 Notes (senior classes of Notes) subject to certain performance triggers described in the Transaction Structure section of the related report (Credit Event). Also, principal proceeds can be used to cover interest shortfalls on the senior classes of Notes (IIIPPP) before being applied to amortize the balances of the Notes. If a Credit Event is in effect, principal proceeds can be used to cover interest shortfalls for the Class A-2 down to Class B-3 Notes only after the more senior tranches are paid in full. Also, the excess spread can be used to cover realized losses.

CORONAVIRUS DISEASE (COVID-19) 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 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 differently from traditional delinquencies. At the onset of the pandemic, the option to forebear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearances 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 any Servicer.

For more information regarding the economic stress assumed under its baseline scenario, please see the DBRS Morningstar commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns: June 2022 Update,” published June 29, 2022.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition
-- Improved underwriting standards
-- Compliance with the ATR rules
-- Comprehensive third-party due-diligence review

The transaction also includes the following challenges:

-- Alternative documentation loans and loans to self-employed borrowers
-- Non-QM and investor loans
-- Representations and warranties framework
-- Servicer's financial capability
-- Servicer advances of delinquent P&I

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors 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.

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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