DBRS Morningstar Finalizes Provisional Ratings on GCAT 2022-NQM5 Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2022-NQM5 (the Certificates) issued by GCAT 2022-NQM5 Trust (the Trust or the Issuer):

-- $328.0 million Class A-1 at AAA (sf)
-- $31.6 million Class A-2 at A (high) (sf)
-- $44.4 million Class A-3 at A (sf)
-- $17.4 million Class M-1 at BBB (sf)
-- $13.5 million Class B-1 at BB (sf)
-- $12.8 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Certificates reflects 28.30% of credit enhancement provided by subordinated Certificates. The A (high) (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 21.40%, 11.70%, 7.90%, 4.95%, and 2.15% 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 844 mortgage loans with a total principal balance of $457,414,041 as of the Cut-Off Date (October 1, 2022).

The originators for the mortgage pool are Arc Home LLC (Arc Home; 53.0%); Quontic Bank (Quontic; 44.6%); and other originators, each comprising less than 15.0% of the mortgage loans. These loans were originated primarily under the following five programs:
-- Bank Statement Loans
-- Full Documentation Loans
-- Debt Service Coverage Ratio
-- Asset Depletion Loans

NewRez LLC doing business as Shellpoint Mortgage Servicing (SMS) will act as Servicer of the loans.

Blue River Mortgage III LLC will act as the Sponsor, Red Creek Asset Management LLC will act as the Servicing Administrator, and Nationstar Mortgage LLC will act as the Master Servicer. GCAT NQM Depositor III, LLC will act as the Depositor. U.S. Bank Trust Company, National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will act as the Trustee, Securities Administrator and Certificate Registrar. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will serve as the Custodian.

Although the mortgage loans, except for the business-purpose investor loans, were originated to satisfy the Consumer Financial Protection Bureau’s Qualified Mortgage (QM) and 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 QM/ATR rules, 16.9% of the loans are designated as non-QM, 23.8% as QM Safe Harbor, and 3.6% as QM Rebuttable Presumption. Approximately 55.7% of the loans were made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Additionally, Quontic Bank originated 44.6% of the loans and is designated by the U.S. Department of the Treasury as a Community Development Financial Institution (CDFI). Such loans are exempt from the QM/ATR rules. While CDFI loans are not required to comply with the ATR rules, the CDFI loans included in this pool were made to mostly creditworthy borrowers with a weighted-average (WA) debt-to-income ratio of 31.7% and a WA credit score of 738.

The Servicer will fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent. 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. The Servicer has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. However, the Servicer will be required to advance P&I at the end of the related forbearance period.

On or after the earlier of (1) three years from the Closing Date 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, at its option, may redeem all the outstanding Certificates at a price equal to the class balances of the related Certificates plus accrued and unpaid interest, including any cap carryover amounts plus any preclosing deferred amounts due to the Class X Certificates. After such purchase, the Depositor must complete 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 Depositor will also have the option, but not the obligation, to purchase 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.

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

Excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to A-3. Of note, interest and principal otherwise available to pay the Class B-3 interest and interest shortfalls may be used to pay the Class A Cap Carryover amounts. The fixed rate for the classes B-1 and B-2 will be 0.000% on and after the distribution date in November 2026. In addition, the Class A-1, A-2, and A-3 coupons step up by 1.000% on and after the payment date in November 2026.

In contrast to other securitizations that typically retain a residual interest consisting of at least 5% of the Certificates, GCAT 2022-NQM5 is subject to an adjusted required credit risk. Under U.S. Risk Retention rules, the percentage retained by the sponsor is eligible to be reduced by the ratio of the CDFI loan balances to the aggregate pool balance i.e. reduction by 44.7% in this transaction. As such, the Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal residual interest consisting of at least 2.8% of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On September 28, 2022, Hurricane Ian caused extensive flooding and other substantial damage throughout Florida and parts of North Carolina, South Carolina, and Virginia. As a result of Hurricane Ian, state of emergencies were declared in Florida, Georgia, North Carolina, South Carolina, and Virginia. The Issuer ordered post disaster inspections (PDIs) for properties located in ZIP codes that have been approved by FEMA for individual assistance as a result of damage caused by the hurricane. Prior to the closing date, to the extent the PDIs report material damage to properties in the affected areas, the loans secured by those mortgaged properties will be removed from the pool. For PDIs that report material damage after the closing date, the Issuer will assess the condition of the properties and the borrowers’ remediation plans at that time to determine whether the loans secured by those properties need to be removed from the pool.

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 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 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 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, no loans 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: September 2022 Update,” dated September 19, 2022.

The ratings reflect transactional strengths that include the following:
-- Robust loan attributes and pool composition;
-- Substantial borrower equity;
-- Improved underwriting standards;
-- Compliance with the ATR rules; and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:
-- Nonprime, non-QM, CDFI, and investor 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 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].

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277