DBRS Morningstar Assigns Provisional Ratings to Towd Point Mortgage Trust 2022-3

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the Asset-Backed Securities, Series 2022-3 (the Notes) to be issued by Towd Point Mortgage Trust 2022-3 (TPMT 2022-3 or the Trust) as follows:

-- $428.6 million Class A1 at AAA (sf)
-- $23.3 million Class A2 at AA (sf)
-- $11.4 million Class M1 at A (low) (sf)
-- $8.9 million Class M2 at BBB (low) (sf)
-- $5.4 million Class B1 at BB (low) (sf)
-- $3.5 million Class B2 at B (high) (sf)
-- $428.6 million Class A1A at AAA (sf)
-- $428.6 million Class A1AX at AAA (sf)
-- $428.6 million Class A1B at AAA (sf)
-- $428.6 million Class A1BX at AAA (sf)
-- $23.3 million Class A2A at AA (sf)
-- $23.3 million Class A2AX at AA (sf)
-- $23.3 million Class A2B at AA (sf)
-- $23.3 million Class A2BX at AA (sf)
-- $23.3 million Class A2C at AA (sf)
-- $23.3 million Class A2CX at AA (sf)
-- $11.4 million Class M1A at A (low) (sf)
-- $11.4 million Class M1AX at A (low) (sf)
-- $11.4 million Class M1B at A (low) (sf)
-- $11.4 million Class M1BX at A (low) (sf)
-- $11.4 million Class M1C at A (low) (sf)
-- $11.4 million Class M1CX at A (low) (sf)
-- $8.9 million Class M2A at BBB (low) (sf)
-- $8.9 million Class M2AX at BBB (low) (sf)
-- $8.9 million Class M2B at BBB (low) (sf)
-- $8.9 million Class M2BX at BBB (low) (sf)
-- $8.9 million Class M2C at BBB (low) (sf)
-- $8.9 million Class M2CX at BBB (low) (sf)

Classes A1AX, A1BX, A2AX, A2BX, A2CX, M1AX, M1BX, M1CX, M2AX, M2BX, and M2CX are interest-only notes. The class balances represent notional amounts.

Classes A1A, A1AX, A1B, A1BX, A2A, A2AX, A2B, A2BX, A2C, A2CX, M1A, M1AX, M1B, M1BX, M1C, M1CX, M2A, M2AX, M2B, M2BX, M2C, and M2CX are exchangeable notes. These classes can be exchanged for combinations of exchange notes as specified in the offering documents.

The AAA (sf) rating on the Notes reflects 13.40% of credit enhancement provided by subordinated certificates. The AA (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (high) (sf) ratings reflect 8.70%, 6.40%, 4.60%, 3.50%, and 2.80% of credit enhancement, respectively.

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

This transaction is a securitization of a portfolio of predominantly seasoned performing and reperforming first-lien mortgages funded by the issuance of asset-backed notes (the Notes). The Notes are backed by 3,003 loans with a total principal balance $494,969,903 as of the Cut-Off Date (July 31, 2022).

The portfolio is an average of approximately 186 months seasoned, and 97.9% of the loans are more than 24 months seasoned. Modified loans make up 62.1% of the portfolio, and modifications happened more than two years ago for 89.1% of those loans. Within the pool, 683 mortgages, equating to approximately 2.1% of the total principal balance, have non-interest-bearing deferred amounts. No Home Affordable Modification Program or proprietary principal forgiveness amounts included in the deferred amounts.

As of the Cut-Off Date, 97.4% of the pool is current and 2.6% is 30 days delinquent under the Mortgage Bankers Association (MBA) delinquency method. Additionally, 0.8% of the pool is in bankruptcy (all non-coronavirus bankruptcy loans are performing or 30 days delinquent). Approximately 85.6% of the mortgage loans have been zero times 30 days delinquent for at least the past 24 months under the MBA delinquency or since origination.

The majority of the pool (97.6%) is exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules. The loans subject to the ATR rules are designated as Temporary QM Safe Harbor (1.7%), QM Safe Harbor (0.5%), Non-QM (0.2%), and Higher Priced QM (<0.1%).

FirstKey Mortgage, LLC (FirstKey) will acquire certain loans (90.0% of the pool) from various transferring trusts on the Closing Date. The transferring trusts acquired the mortgage loans between March 2014 and June 2022 and are beneficially owned by funds managed by affiliates of Cerberus Capital Management, L.P. Upon acquiring the loans from the transferring trusts, FirstKey, through a wholly owned subsidiary, Towd Point Asset Funding, LLC (the Depositor), will contribute loans to the Trust. In addition, the Depositor, at the direction of the Sponsor, will sell the remaining loans (10.0% of the pool) to the Trust on the Closing Date. As the Sponsor, FirstKey, through one or more majority-owned affiliates, will acquire and retain a 5% eligible vertical interest in each class of securities to be issued (other than any residual certificates) to satisfy the credit risk retention requirements. These loans were originated and previously serviced by various entities through purchases in the secondary market.

As of the Closing Date, all of the loans will be serviced by Select Portfolio Servicing, Inc. (SPS). The SPS aggregate servicing fee rate for each payment date is 0.13% per annum.

There will not be any advancing of delinquent principal or interest on any mortgages by the servicer or any other party to the transaction; however, the servicer is obligated to make certain advances in respect of homeowner association fees, taxes, and insurance, installment payments on energy improvement liens, and reasonable costs and expenses incurred in the course of servicing and disposing of properties.

FirstKey, as the Asset Manager, has the option to sell certain nonperforming loans or real estate owned (REO) properties to unaffiliated third parties individually or in bulk sales. Such sales require an asset sale price at least equal to a minimum reserve amount of the product of (1) 78.61% and (2) the current principal amount of the mortgage loans or REO properties as of the sale date.

When the aggregate pool balance of the mortgage loans is reduced to less than 30.0% of the Cut-Off Date balance, the Call Option Holder (TPMT 2022-3 COH, LLC, which is an affiliate of the Sponsor, the Seller, the Asset Manager, the Depositor, and the Risk Retention Holder) will have the option to cause the Issuer to sell all of its remaining property (other than amounts in the Breach Reserve Account) to one or more third-party purchasers so long as the aggregate proceeds meet a minimum price.

When the aggregate pool balance is reduced to less than 10% of the balance as of the Cut-Off Date, the Call Option Holder may purchase all of the mortgage loans, REO properties, and other properties from the Issuer, as long as the aggregate proceeds meet a minimum price.

The transaction employs a sequential-pay cash flow structure. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M1 and more subordinate bonds will not be paid from principal proceeds until the Class A1 and A2 Notes are retired.

Coronavirus Impact
The Coronavirus Disease (COVID-19) 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 pandemic-induced forbearances in 2020 performed better than expected, thanks to government aid, low loan-to-value ratios (LTVs), 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.

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:

-- LTVs relative to reperforming pools,
-- Satisfactory third-party due-diligence review,
-- Strong servicer,
-- Asset manager oversight,
-- Loan seasoning, and
-- Current loan status.

The transaction also includes the following challenges:

-- Representations and warranties framework,
-- No advances of delinquent principal and interest, and
-- Missing assignments and endorsements.

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

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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