DBRS Morningstar Finalizes Provisional Ratings on Verus Securitization Trust 2022-2

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the Mortgage-Backed Notes, Series 2022-2 (the Notes) issued by Verus Securitization Trust 2022-2 (VERUS 2022-2 or the Trust) as follows:

-- $491.9 million Class A-1 at AAA (sf)
-- $69.1 million Class A-2 at AA (high) (sf)
-- $89.5 million Class A-3 at A (sf)
-- $42.3 million Class M-1 at BBB (low) (sf)
-- $24.9 million Class B-1 at BB (sf)
-- $18.5 million Class B-2 at B (low) (sf)

The AAA (sf) rating on the Class A-1 certificates reflects 34.90% of credit enhancement provided by subordinated certificates. The AA (high) (sf), A (sf), BBB (low) (sf), BB (sf), and B (low) (sf) ratings reflect 25.75%, 13.90%, 8.30%, 5.00%, and 2.55% of credit enhancement, respectively.

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

This a securitization of a portfolio of primarily fixed- and adjustable-rate, expanded prime and nonprime, first-lien residential mortgages funded by the issuance of the Mortgage-Backed Notes, Series 2022-2. The Notes are backed 1,268 mortgage loans with a total principal balance of $755,593,539 as of the Cut-Off Date ( December 1, 2022).

The pool was originated by various originators, each contributing less than 15.0% of the loans to the Trust. Shellpoint will act as the Servicer for all loans.
 
Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) 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, 45.7% of the loans are designated as non-QM, 0.1% are designated as QM Rebuttable Presumption, and 1.6% are designated as QM Safe Harbor. Approximately 52.6% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules.

Approximately 43.9% of the loans were originated under a Property Focused Investor Loan Debt Service Coverage Ratio (DSCR) program and 0.6% were originated under a Property Focused Investor Loan program. Both programs allow for property cash flow/rental income to qualify borrowers for income.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical interest, representing at least 5% 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. Additionally, as of the Closing Date, the Sponsor is expected to initially be the beneficial holder with respect to 100% of the Class B-3 Notes, and the Class A-IO-S and Class XS Certificates.

Nationstar Mortgage LLC dba Mr. Cooper Master Servicing will be the Master Servicer. Wilmington Savings Fund Society, FSB will act as the Indenture and Owner Trustee. Computershare Trust Company, N.A. (Computershare; rated BBB with a Stable trend by DBRS Morningstar) will act as the Custodian.

On or after the earlier of (1) the Payment Date occurring in November 2027 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 10% of the Cut-Off Date balance, the Administrator, at the Optional Redemption Right Holder's option, may redeem all of the outstanding Notes at a price equal to the greater of (A) the class balances of the related Notes plus accrued and unpaid interest, including any cap carryover amounts and (B) the class balances of the related Notes less than 90 days delinquent with accrued unpaid interest plus fair market value of the loans 90 days or more delinquent and real estate-owned properties. 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 Principal and Interest (P&I) Advancing Party will fund advances of delinquent P&I on any mortgage until such loan becomes 90 days delinquent. The P&I Advancing Party has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. The Servicer, however, is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.

This transaction incorporates a sequential-pay cash flow structure with a pro rata feature among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Class A-1 and A-2 Notes sequentially (IIPP) after a Trigger Event. For more subordinated Notes, principal proceeds can be used to cover interest shortfalls as the more senior Notes are paid in full. 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 down to Class A-3.

The transaction assumptions consider DBRS Morningstar's baseline macroeconomic scenarios for rated sovereign economics, available in its commentary: Baseline Macroeconomic Scenarios For Rated Sovereigns September 2022 Update, dated September 19, 2022. These baseline macroeconomic scenarios replace DBRS Morningstar's moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

The ratings reflect transactional strengths that include the following:

-- Robust pool composition,
-- Satisfactory third-party due-diligence review, and
-- Improved underwriting standards.

The transaction also includes the following challenges:

-- Certain nonprime, Non-QM and investor loans
-- Representations and warranties framework,
-- Three-month advances of delinquent P&I, and
-- P&I advancing party’s 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 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/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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