DBRS Morningstar Assigns Provisional Ratings to CHNGE Mortgage Trust 2022-4

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage Pass-Through Certificates, Series 2022-4 (the Certificates) to be issued by CHNGE Mortgage Trust 2022-4 (CHNGE 2022-4 or the Trust):

-- $358.6 million Class A-1 at A (sf)
-- $26.5 million Class M-1 at BBB (sf)
-- $25.3 million Class B-1 at BB (sf)
-- $24.7 million Class B-2 at B (sf)

The A (sf) rating on the Class A-1 certificates reflects 22.90% of credit enhancement provided by subordinated certificates. The BBB (sf), BB (sf), and B (sf) ratings reflect 17.20%, 11.75%, and 6.45% 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 expanded prime first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 776 mortgage loans with a total principal balance of $465,088,536 as of the Cut-Off Date (September 1, 2022).

CHNGE 2022-4 represents the fourth securitization issued by the Sponsor, Change Lending, LLC (Change) comprised entirely of loans from their Community Mortgage and EZ-Prime programs. All 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.

While loans originated by a CDFI are not required to comply with the Consumer Financial Protection Bureau’s Qualified Mortgage and Ability-to-Repay rules, the mortgages included in this pool were made to generally creditworthy borrowers with near-prime credit scores, low loan-to-value ratios (LTVs), and robust reserves.

The loans in the pool were underwritten through Change's Community Mortgage (98.2%) and E-Z Prime (1.8%) programs, both of which are considered weaker than other origination programs because income documentation verification is not required. Generally, underwriting practices of these programs focus on borrower credit, borrower equity contribution, housing payment history, and liquid reserves relative to monthly mortgage payments. Because post-2008 crisis historical performance is limited on these products, DBRS Morningstar applied additional assumptions to increase the expected losses for the loans in its analysis.

On or after the earlier of (1) the distribution date occurring in September 2024 and (2) the date on which the aggregate stated principal balance of the loans falls to 30% or less of the Cut-Off Date balance, at its option, the Depositor may redeem all of the outstanding certificates at the redemption price (par plus interest). Such optional redemption may be followed by a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

The Sponsor will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent (not related to a Coronavirus Disease (COVID-19) forbearance) under the Mortgage Bankers Association method at par plus interest, provided that such purchases in aggregate do not exceed 7.5% of the total principal balance as of the Cut-Off Date.

Change is the Servicer for the transaction. LoanCare, LLC (66.1%) and NewRez LLC doing business as Shellpoint Mortgage Servicing (33.9%) are the Subservicers. The Servicer will 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.

This transaction employs a sequential-pay cash flow structure. Principal proceeds can be used to cover interest shortfalls on certificates, but such shortfalls on the Class M-1 certificates and more subordinate bonds will not be paid from principal proceeds until the more senior classes are retired. Furthermore, 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.

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 retain the Class B-3, A-IO-S, and XS certificates.

Coronavirus Pandemic 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 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.

As of the Cut-Off Date, there are no loans that are subject to an active coronavirus-related forbearance plan with the Servicer or a Subservicer.

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,
-- Satisfactory third-party due-diligence review, and
-- 100% current loans.

The transaction also includes the following challenges:

-- CDFI no ratio loans,
-- Representations and warranties framework,
-- Three-month advances of delinquent P&I, and
-- Servicers’ financial capability.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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 (May 17, 2022).

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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