DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage-Backed Notes, Series 2023-HE2 (the Notes) to be issued by FIGRE Trust 2023-HE2 (FIGRE 2023-HE2):
-- $151.8 million Class A Notes at AAA (sf)
-- $20.4 million Class B Notes at A (low) (sf)
The AAA (sf) rating on the Class A Notes reflects 26.10% of credit enhancement provided by subordinate notes. The A (low) (sf) rating reflects 16.15% of credit enhancement, respectively.
Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.
This transaction is a securitization of recently originated first- and junior-lien revolving home equity lines of credit (HELOCs) funded by the issuance of the Notes. The Notes are backed by 2,812 loans (individual HELOC draws) which correspond to 2,783 HELOC families (each consisting of an initial HELOC draw and subsequent draws by the same borrower) with a total unpaid principal balance (UPB) of $205,444,368 and a total current credit limit of $208,347,889 as of the Cut-Off Date (May 8, 2023). The portfolio, on average, is one month seasoned, though seasoning ranges from one to 13 months. All of the HELOCs are current, and all but thre of the HELOCs (more than 99.9%) have been performing since origination.
Figure Lending LLC (Figure or the Company) is a wholly owned, indirect subsidiary of Figure Technologies, Inc. (Figure Technologies) that was formed in 2018. A financial services and technology company, Figure Technologies leverages technology, including blockchain, for the origination and servicing of loans, loan payments, and loan sales. Figure’s suite of lending products includes HELOCs, student loan refinances, conforming and jumbo first-lien mortgages, and unsecured personal loans. The Company routinely sells the HELOC, personal, and mortgage loans it originates with servicing rights retained. As of April 30, 2023, Figure originated, funded, and serviced more than 80,000 HELOCs totaling approximately $5.3 billion.
Figure is the Originator of most and the Servicer of all HELOCs in the pool. Other originators in the pool are Guaranteed Rate, Inc., Movement Mortgage, LLC, Homepoint Financial Corporation, Synergy One Lending, Inc., New American Funding, LLC, Homebridge Financial Services, Inc. and certain other lenders (together, the White Label Partner Originators). The White Label Partner Originators originated HELOCs using Figure's online origination applications under Figure’s underwriting guidelines. Also, Figure is the Seller of all the HELOCs. DBRS Morningstar performed a telephone review of Figure’s origination and servicing platform and believes the Company is an acceptable HELOC originator and servicer with a backup servicer that is acceptable to DBRS Morningstar.
Figure is the transaction’s Sponsor. FIGRE 2023-HE2 is the second rated securitization of HELOCs by the Sponsor. Previously, Figure sponsored FIGRE Trust 2023-HE1, a DBRS Morningstar-rated securitization of similar HELOCs, and FLOC 2020-1, an unrated securitization of approximately $149 million of HELOCs that were originated, serviced, financed, and sold via the Provenance Blockchain. Also, Figure-originated HELOCs are included in two unrated securitizations, GRADE 2020-FIG1 and GRADE 2021-FIG2, sponsored by Saluda Grade. These transactions’ performance to date is satisfactory.
The transaction includes mostly junior liens and some first-lien HELOCs.
In this transaction, all loans are open-HELOCs that have a draw period of two, three, four, or five years during which borrowers may make draws up to a credit limit, though such right to make draws may be temporarily frozen, suspended, or terminated under certain circumstances. At the end of the draw term, the HELOC mortgagors have a repayment period ranging from three to 25 years. During the repayment period, borrowers are no longer allowed to draw, and their monthly principal payments will equal an amount that allows the outstanding loan balance to evenly amortize down. All HELOCs in this transaction are fixed-rate loans. The HELOCs have no interest-only payment period, so borrowers are required to make both interest and principal payments during the draw and repayment periods. No loans require a balloon payment.
The loans are made mainly to borrowers with prime and near-prime credit quality who seek to take equity cash out for various purposes. These HELOCs are fully drawn at origination, as evidenced by the weighted-average (WA) utilization rate of approximately 99.3% after one month of seasoning on average. For each borrower, the HELOC, including the initial and any subsequent draws, is defined as a loan family within which every new credit line draw becomes a de facto new loan with a new fixed interest rate determined at the time of the draw by adding the margin determined at origination to the then current prime rate, floored at the original rate.
Relative to other HELOCs in DBRS Morningstar-rated deals, the loans in the pool are all fixed rate, fully amortizing with a shorter draw period and may have terms significantly shorter than 30 years, including five- to 10-year maturities.
Certain Unique Factors in HELOC Origination Process
Figure seeks to originate HELOCs for borrowers of prime and near-prime credit quality with ample home equity. It leverages technology in underwriting, title searching, regulatory compliance, and other lending processes to shorten the approval and funding process and improve the borrower experience. Below are certain aspects in the lending process that are unique to Figure’s origination platform:
-- To qualify a borrower for income, Figure seeks to confirm the borrower’s stated income using proprietary technology algorithms.
-- The lender uses the FICO 9 credit score model instead of the classic FICO credit score model used by most mortgage originators.
-- Instead of title insurance, Figure uses an electronic lien search algorithm to identify existing property liens.
-- Figure uses a property valuation provided by an automatic valuation model (AVM) instead of a full property appraisal.
The credit impact of these factors is generally loan specific. Although technologically advanced, the income, employment, and asset verification methods used by Figure were treated as less than full documentation in the RMBS Insight model. In addition, DBRS Morningstar applied haircuts to the provided AVM valuations, reduced the projected recoveries on junior-lien HELOCs, and generally stepped up expected losses from the model to account for a combined effect of these and other factors. Please see the Documentation Type and Underwriting Guidelines sections of the related report for details.
Figure will service all loans within the pool for a servicing fee of 0.25% per year. Also, Specialized Loan Servicing LLC (SLS) will act as a Subservicer for loans that default or are 60 or more days delinquent under the Mortgage Bankers Association (MBA) method. In addition, Northpointe Bank (Northpointe) will act as a Backup Servicer for all mortgage loans in this transaction for a fee of 0.01% per year. If Figure fails to remit the required payments, fails to observe or perform the Servicer's duties, or experiences other unremedied events of default described in detail in the transaction documents, servicing will be transferred to Northpointe from Figure, under a successor servicing agreement. Such servicing transfer will occur within 45 days of the termination of Figure. In the event of a servicing transfer, SLS will retain servicing responsibilities on all loans that were being special serviced by SLS at the time of the servicing transfer. DBRS Morningstar performed a review of Northpointe's servicing platform and believes the company is an acceptable loan servicer for DBRS Morningstar-rated transactions.
The Bank of New York Mellon will serve as Indenture Trustee, Paying Agent, Note Registrar, Certificate Registrar, and REMIC Administrator. Wilmington Savings Fund Society, FSB will serve as the Custodian and the Owner Trustee. DV01, Inc. will act as the loan data agent.
The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest consisting of the required percentage of the Class A, B, and CE Note amounts and Class FR Certificate to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. The Sponsor or a majority-owned affiliate of the Sponsor will be required to hold the required credit risk until the later of (1) the fifth anniversary of the Closing Date and (2) the date on which the aggregate loan balance has been reduced to 25% of the loan balance as of the Cut-Off Date, but in any event no longer than the seventh anniversary of the Closing Date.
Similar to other transactions backed by junior-lien mortgage loans or HELOCs, in this transaction, any HELOCs, including first and junior liens, that are 180 days delinquent under the MBA delinquency method will be charged off.
Draw Funding Mechanism
This transaction uses a structural mechanism similar to other HELOC transactions to fund future draw requests. The Servicer will be required to fund draws and will be entitled to reimburse itself for such draws from the principal collections prior to any payments on the Notes and the Class FR Certificates.
If the aggregate draws exceed the principal collections (Net Draw), the Servicer is entitled to reimburse itself for draws funded from amounts on deposit in the Reserve Account (including amounts deposited into the Reserve Account on behalf of the Class FR Certificateholder after the Closing Date).
The Reserve Account has an ongoing target amount according to a schedule. The Reserve Account is partially funded at closing and has an initial balance equal to $1,027,221.84 (or about 0.50% of the collateral balance as of the Cut-Off Date). The target amount will gradually build to $4,417,053.91, or 2.15% of the collateral balance as of the Cut-Off Date in May 2026 (36th payment period after the closing date), according to a schedule that prescribes the required reserve amount for each payment period and is provided in the transaction documents. If the Reserve Account is not at target, the Paying Agent will use the available funds remaining after paying transaction parties' fees and expenses, reimbursing the Servicer for any unpaid fees or Net Draws, and paying the accrued and unpaid interest on the bonds to build it to the target. The top-up of the account occurs before making any principal payments to the Class FR Certificateholder or the Notes. To the extent the Reserve Account is not funded up to its required amount from the principal and interest (P&I) collections, the Class FR Certificateholder will be required to use its own funds to reimburse the Servicer for any Net Draws.
Nevertheless, the servicer is still obligated to fund draws even if the principal collections and the Reserve Account are insufficient in a given month for full reimbursement. In such cases, the Servicer will be reimbursed on subsequent payment dates first, from amounts on deposit in the Reserve Account (subject to the deposited funds), and second, from the principal collections in subsequent collection periods. Figure, as a holder of the Trust Certificate/Class FR Certificates, will have an ultimate responsibility to ensure draws are funded by remitting funds to the Reserve Account to reimburse the Servicer for the draws made on the loans, as long as all borrower conditions are met to warrant draw funding. The Class FR Certificates' balance will be increased by the amount of any Net Draws funded by the Class FR Certificateholder. The Reserve Account's required amount will become $0 on the payment date in April 2028 (after the draw period ends for all HELOCs), at which point the funds will be released through the transaction waterfall.
In its analysis of the proposed transaction structure, DBRS Morningstar does not rely on the creditworthiness of either the Servicer or Figure. Rather, the analysis relies on the assets’ ability to generate sufficient cash flows, as well as the Reserve Account, to fund draws and make interest and principal payments.
Additional Cash Flow Analytics for HELOCs
DBRS Morningstar performs a traditional cash flow analysis to stress prepayments, loss timing, and interest rates. Generally, in HELOC transactions, because prepayments (and scheduled principal payments, if applicable) are primary sources from which to fund draws, DBRS Morningstar also tests a combination of high draw and low prepayment scenarios to stress the transaction.
Because most of the borrowers in this pool have drawn a significant amount of the available credit lines at closing, to test any high draw and low prepay combinations, DBRS Morningstar considers that the borrowers must first repay the credit line in order to draw any meaningful new funds again. Please see the Cash Flow Analysis section of the related report for more details of such scenarios.
The transaction employs a pro rata cash flow structure subject to a Credit Event, which is based on certain performance triggers related to cumulative losses, delinquencies, and Net WA Coupon (WAC) Rate. Relative to the other comparable DBRS Morningstar-rated transactions, this transaction includes a Net WAC Trigger based on a simple three-month average of the Net WAC Rate falling below 10.250%, compared with the collateral WAC of 10.751% as of the Cut-Off Date, which is expected to be reduced to 10.398% by fees and expenses to calculate Net WAC Rate, as described in the transaction documents, in the first payment period. The Net WAC Trigger becomes effective for the payment date in March 2024 after the first nine payment periods, and other triggers are applicable immediately after the Closing Date. Principal distributions are made sequentially when a Credit Event is in effect.
Relative to a sequential pay structure, a pro rata structure subject to sequential trigger (Credit Event) is more sensitive to the timing of the projected defaults and losses as the losses may be applied at a time when the amount of credit support is reduced as the bonds' principal balances amortize over the life of the transaction.
The excess interest remaining from covering the realized losses is used to maintain overcollateralization (OC) at the target. The OC Target is the greater of 16.15% of the outstanding principal balance of the collateral at the end of the related collection period or an OC floor of 3.00% of the Cut-Off Date balance (will not exceed the original amount of Class CE). The excess interest can be released to the residual holder if the OC is built to the target so long as the Credit Event does not exist. Please see the Cash Flow Structure and Features section of the related report for more details.
Other Transaction Features
For this transaction, other than the Servicer’s obligation to fund any monthly Net Draws, described above, neither the Servicer nor any other transaction party will fund any monthly advances of P&I on any HELOC. However, the Servicer is required to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances) to the extent such advances are deemed recoverable or as directed by the Controlling Holder (the holder of more than a 50% interest of the Class CE Notes). For the junior-lien HELOCs, the Servicer will make servicing advances only if such advances are deemed recoverable or if the associate first-lien mortgage has been paid off and such HELOC has become a senior-lien mortgage loan.
The Depositor may, at its option, on or after the earlier of (1) the payment date on which the balance of the Class A Notes is reduced to zero or (2) the date on which the total loans' and real estate owned (REO) properties' balance falls to or below 25% of the loan balance as of the Cut-Off Date (Optional Termination Date), purchase all of the loans and REO properties at the optional termination price described in the transaction documents.
The Depositor, at its option, may purchase any mortgage loan that is 90 days or more delinquent under the MBA method at the repurchase price (Optional Purchase) described in the transaction documents. The total balance of such loans purchased by the Depositor will not exceed 10% of the Cut-Off Date balance.
The Servicer, at a direction of the Controlling Holder, may direct the Issuer to sell (and direct the Indenture Trustee to release its lien on and relinquish its security interest in) eligible nonperforming loans (those 120 days or more delinquent under the MBA method) or REO properties (both, Eligible Nonperforming Loans (NPLs)) to third parties individually or in bulk sales. The Controlling Holder will have a sole authority over the decision to sell the Eligible NPLs, as described in the transaction documents.
The ratings reflect transactional strengths that include the following:
-- Certain HELOC attributes,
-- Robust equity and prime and near-prime credit quality,
-- Current loan status, and
-- Satisfactory third-party due-diligence sample size and compliance review.
The transaction also includes the following challenges:
-- Holder of the Class FR Certificates may fail to reimburse the servicer for draws,
-- Representations and warranties standard,
-- No servicer advances of delinquent principal and interest, and
-- Certain limitations of third-party due-diligence credit and valuation reviews.
The full description of the strengths, challenges, and mitigating factors is detailed in the related report.
ENVIRONMENTAL, SOCIAL, AND 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).
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 (March 3, 2023; https://www.dbrsmorningstar.com/research/410473).
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/413218.
The credit rating was initiated at the request of the rated entity.
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.
This is a solicited credit rating.
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 firstname.lastname@example.org.
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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 (April 28, 2023),
-- Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022),
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023),
-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
-- Operational Risk Assessment for U.S. RMBS Originators (November 23, 2022),
-- Operational Risk Assessment for U.S. RMBS Servicers (November 23, 2022),
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