DBRS Morningstar Finalizes Provisional Ratings on CHNGE 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 CHNGE Mortgage Trust 2022-NQM1 (CHNGE 2022-NQM1):

-- $160.4 million Class A-1 at AAA (sf)
-- $27.6 million Class A-2 at AA (high) (sf)
-- $31.2 million Class A-3 at A (high) (sf)
-- $19.3 million Class M-1 at BBB (high) (sf)
-- $15.6 million Class B-1 at BB (high) (sf)
-- $12.5 million Class B-2 at B (high) (sf)

The AAA (sf) rating on the Class A-1 certificates reflects 43.40% of credit enhancement provided by subordinated certificates. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (high) (sf) ratings reflect 33.65%, 22.65%, 15.85%, 10.35%, and 5.95% of credit enhancement, respectively.

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

This is a securitization of a portfolio of fixed- and adjustable-rate prime, expanded prime, and nonprime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 375 mortgage loans with a total principal balance of $283,304,772 as of the Cut-Off Date (August 1, 2022).

CHNGE 2022-NQM1 represents the fourth securitization issued by the Sponsor, Change Lending, LLC (Change). The first three CHNGE securitizations were issued from the Sponsor's core shelf and comprised loans originated through two programs that do not require income documentation verification (Community Mortgage and E-Z Prime). In contrast, CHNGE 2022-NQM1 predominantly consists of loans originated through programs that may document and qualify borrower income using approaches commonly seen in non-Qualified Mortgage securitizations, such as bank statements, property-level debt service coverage ratios (DSCR), or borrower assets only.

All of the loans in the pool were originated by Change, which is certified by the U.S. Department of the Treasury as a Community Development Financial Institution (CDFI). As a CDFI, Change is required to lend at least 60% of its production to certain target markets, which include low-income borrowers or other underserved communities.

The loans in the pool were originated under the following Change programs: Alt-Doc, CHM Investor, Prime Plus, and Foreign National.

While loans originated by a CDFI are not required to comply with the Consumer Financial Protection Bureau’s Qualified Mortgage and Ability-to-Repay (ATR) rules, the mortgages included in this pool were made to generally creditworthy borrowers with near-prime credit scores, robust reserves, and documentation types similar to those prevalent in non-Qualified Mortgage transactions in the market.

Change serves as the Servicer for the transaction, and LoanCare, LLC (91.4%) and NewRez LLC doing business as Shellpoint Mortgage Servicing (8.6%) are the Subservicers. Nationstar Mortgage LLC will act as the Master Servicer, and Citibank, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar) will act as Securities Administrator.

Change, as Servicer, will generally fund advances of delinquent principal and interest (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.

Under the U.S. Risk Retention Rules, CDFI loans fall within the definition of “community-focused residential mortgages.” A securitization transaction containing only community-focused residential mortgages is exempt under the U.S. Risk Retention Rules and, accordingly, the Sponsor will not be required to retain any credit risk under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Notwithstanding the exemption, Change has elected to initially retain the Class B-3, XS, and A-IO-S Certificates.

The Sponsor will have the option, but not the obligation, to repurchase any mortgage loan (other than loans under forbearance plan as of the Closing Date) that becomes 90 or more days delinquent or are in real estate owned at the repurchase price (par plus interest), 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 earlier of (1) the Distribution date occurring in August 2025 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30% of the Cut-Off Date balance, 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 (Optional Redemption).

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior classes (Classes A-1, A-2, and A-3) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). After a Trigger Event, principal proceeds can be used to cover interest shortfalls on Class A-1 and then A-2 before being applied sequentially to amortize the balances of the certificates (IIPP). For all other classes, principal proceeds can be used to cover interest shortfalls after the more senior tranches are paid in full.

Excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to B-2. Of note, interest and principal otherwise available to pay the Class B-3 interest and interest shortfalls may be used to pay the Cap Carryover Amounts. In addition, the Class A-1, A-2, A-3, M-1, B-1, and B-2 coupons step up by 1.00% after the payment date in August 2026.

Coronavirus Pandemic 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 coronavirus, 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 very differently from traditional delinquencies. At the onset of the coronavirus, 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 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 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: June 2022 Update,” dated June 29, 2022.

The ratings reflect transactional strengths that include the following:

-- Robust loan attributes and pool composition
-- Improved underwriting standards
-- Consideration of ATR for certain loans
-- Satisfactory third-party due-diligence review
-- 100% current loans

The transaction also includes the following challenges:

-- Nonprime and alternative documentation loans
-- Investor DSCR and no ratio loans
-- Representations and Warranties Framework
-- Three-month servicer advances of delinquent P&I
-- Servicers’ financial capability.

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

There were no environmental, social, and 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/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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