DBRS Morningstar Finalizes Provisional Ratings on CHNGE Mortgage Trust 2023-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage Pass-Through Certificates, Series 2023-1 (the Certificates) issued by CHNGE Mortgage Trust 2023-1 (CHNGE 2023-1 or the Trust):

-- $175.0 million Class A-1 at A (sf)
-- $13.4 million Class M-1 at BBB (sf)
-- $11.7 million Class B-1 at BB (sf)
-- $12.3 million Class B-2 at B (sf)

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

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 17.00%, 11.85%, and 6.45% of credit enhancement, respectively.

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 419 mortgage loans with a total principal balance of $ 227,022,631 as of the Cut-Off Date (February 1, 2023).

CHNGE 2023-1 represents the sixth securitization issued by the Sponsor, Change Lending, LLC (Change) 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 (CFPB) Qualified Mortgage (QM) and Ability-to-Repay (ATR) 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 (99.1%) and E-Z Prime (0.9%) 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.

On or after the earlier of (1) the distribution date occurring in February 2026 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 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) the 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 (MBA) 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. NewRez LLC doing business as (dba) Shellpoint Mortgage Servicing (91.6 %) and LoanCare, LLC (8.4 %) 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 while 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. Of note, the Class A-1 fixed rate step up by 100 basis points after the payment date in February 2027, and P&I otherwise payable to the Class B-3 as accrued and unpaid interest may also be used to pay Cap Carryover Amounts. 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 initially retain, the Class B-3, A-IO-S, and XS certificates.

The transaction assumptions consider DBRS Morningstar's baseline macroeconomic scenarios for rated sovereign economics, available in its commentary “Baseline Macroeconomic Scenarios For Rated Sovereigns: December 2022 Update,” published December 21, 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 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 Rating 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 (May 17, 2022).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020; https://www.dbrsmorningstar.com/research/359116).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

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/407678/baseline-macroeconomic-scenarios-for-rated-sovereigns-december-2022-update.

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.

DBRS, Inc.
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New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (May 4, 2020),
https://www.dbrsmorningstar.com/research/360574
-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
https://www.dbrsmorningstar.com/research/402153
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
https://www.dbrsmorningstar.com/research/366613
-- Representations and Warranties Criteria for U.S. RMBS Transactions (April 22, 2020),
https://www.dbrsmorningstar.com/research/359902
-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008
-- Operational Risk Assessment for U.S. RMBS Originators (November 23, 2022),
https://www.dbrsmorningstar.com/research/405664
-- Operational Risk Assessment for U.S. RMBS Servicers (November 23, 2022),
https://www.dbrsmorningstar.com/research/405665

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].