DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Mortgage-Backed Securities, Series 2023-C (the Notes) to be issued by Ajax Mortgage Loan Trust 2023-C (AJAX 2023-C or the Trust):
-- $135.7 million Class A-1 at AAA (sf)
-- $7.6 million Class A-2 at AA (sf)
-- $4.1 million Class A-3 at A (sf)
-- $3.6 million Class M-1 at BBB (sf)
-- $22.1 million Class M-2 at BB (sf)
The AAA (sf) rating on the Notes reflects 33.35% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), and BB (sf) ratings reflect 29.60%, 27.60%, 25.85%, and 15.00% of credit enhancement, respectively.
Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.
The Trust is a securitization of a portfolio of seasoned performing and reperforming first-lien residential mortgages funded by the issuance of the Notes. The Notes are backed by 1,171 loans with a total principal balance of $203,810,262 as of the Cut-Off Date (May 31, 2023).
The mortgage loans are approximately 196 months seasoned. Although the number of months clean (consecutively zero times 30 (0 x 30) days delinquent) at issuance is weaker relative to other DBRS Morningstar-rated seasoned transactions, the borrowers demonstrate reasonable cash flow velocity (as by number of payments over time) in the past six, 12, and 24 months.
The portfolio contains 88.8% modified loans. The modifications happened more than two years ago for 83.0% of the modified loans. Within the pool, 509 mortgages (43.5% of the pool) have non-interest-bearing deferred principal balances and deferred interest amounts (including Principal Reduction Alternative deferred principal balances) of $14,713,252, which equate to approximately 7.2% of the total principal balance.
The mortgage loans were previously included in prior securitizations issued by Great Ajax Operating Partnership L.P. (Ajax or the Sponsor). The Seller will acquire such loans as a result of the exercise of loan sale rights, and, on the Closing Date, the mortgage loans will be conveyed by the Seller to the Depositor.
To satisfy the credit risk retention requirements, the Sponsor or a majority-owned affiliate of the Sponsor will retain at least a 5% eligible vertical interest in the securities.
Gregory Funding LLC is the Servicer for the entire pool and will not advance any delinquent principal and interest (P&I) on the mortgages; however, the Servicer is obligated to make advances in respect of prior liens, insurance, real estate taxes and assessments as well as reasonable costs and expenses incurred in the course of servicing and disposing of properties.
Since 2013, Ajax and its affiliates have issued 46 securitizations under the Ajax Mortgage Loan Trust shelf prior to AJAX 2023-C. These issuances were backed by seasoned loans, reperforming loans (RPLs), or nonperforming loans (NPLs) and are mostly unrated by DBRS Morningstar. DBRS Morningstar reviewed the historical performance of the Ajax shelf; however, the nonrated deals generally exhibit worse collateral attributes than the rated deals with regard to delinquencies at issuance. The prior nonrated Ajax transactions generally exhibit relatively high levels of delinquencies and losses compared with the rated Ajax securitizations, which are expected given the nature of these severely distressed assets.
AJAX 2023-C has the option to redeem the rated Notes in full at a price equal to the remaining note amount of the rated Notes plus accrued and unpaid interest, and any unpaid expenses and reimbursement amounts (Rated Note Redemption Price). Such Rated Note Redemption Rights may be exercised on any date:
-- Beginning the Payment Date after the Redemption Account equals or exceeds the Rated Note Redemption Price (Funded Redemption); or
-- Beginning three years after the Closing Date at the direction of the Depositor or, if the Depositor does not intend to redeem, the Majority Controlling Holders (Optional Redemption).
The Redemption Date is any date when a Funded Redemption or an Optional Redemption occurs.
The transaction employs a sequential-pay cash flow structure with a bullet feature to Class A-2 and more subordinate notes on the Redemption Date. P&I collections are commingled and are first used to pay interest to the Notes sequentially and then to pay Class A-1 until reduced to zero, which may provide for timely payment of interest to certain rated Notes. Class A-2 and below are not entitled to any payments of principal until the Redemption Date or upon the occurrence of an Event of Default. Prior to the Redemption Date or an Event of Default, any available funds remaining after Class A-1 is paid in full will be deposited into a Redemption Account.
After the Payment Date in July 2030 (Step-Up Date), the Class A-1 Notes will be entitled to its initial Note Rate plus the Step-Up Note Rate of 1.00% per annum. If the Trust does not redeem the rated Notes in full by the Step-Up Date, an Accrual Event will be in effect until the earlier of the Redemption Date or the occurrence of an Event of Default.
If an Accrual Event is in effect and Class A-1 is outstanding, Class A-2 and more subordinate notes will become accrual Notes, and interest that would otherwise be allocated to such classes will be paid as principal to the Class A-1 Notes until reduced to zero. Any excess accrual amounts on such payment date will be deposited into the Redemption Account. All such accrual amounts will be added to the principal balance of the related outstanding accrual Notes. If an Accrual Event is in effect and Class A-1 is no longer outstanding, Class A-2 will be entitled to interest from available funds, or from the Redemption Account, as applicable. Class A-2 and more subordinate notes will only receive principal on the Redemption Date or upon the occurrence of an Event of Default.
If a Redemption Date or an Event of Default has not occurred prior to the Stated Final Maturity Date, amounts in the Redemption Account will be paid, sequentially, as interest and then as principal to the Notes until reduced to zero (IPIP) on the Stated Final Maturity Date.
In addition to the above bullet and accrual features, a certain aspect of the interest rates on the Notes is less commonly seen in DBRS Morningstar-rated seasoned securitizations as well. The interest rates on the Notes are set at fixed rates, which are not capped by the net weighted-average coupon (Net WAC) or available funds. This feature causes the structure to need elevated subordination levels relative to a comparable structure with fixed-capped interest rates because more principal must be used to cover interest shortfalls. DBRS Morningstar considered such nuanced features and incorporated them in its cash flow analysis.
Similar to AJAX 2023-A, the representations and warranties (R&W) framework for this transaction incorporates the following features:
-- A pool-level review trigger that incorporates only cumulative losses, dissimilar to other rated RPL securitizations;
-- The absence of a repurchase remedy by the Seller, dissimilar to other rated RPL securitizations; and
-- A Breach Reserve Account, which will be available to satisfy losses related to R&W breaches. Such account is fully funded upfront and then funds after interest is paid to the Notes, dissimilar to other rated RPL securitizations.
Although certain features (the cumulative loss-only pool trigger, the absence of the Seller repurchase remedy, and the Breach Reserve Account shortfall amounts funding after interest) weaken the R&W framework, the historical experience of having minimal putbacks and comprehensive third-party due diligence for the shelf mitigates these features. In addition, the Breach Reserve Account is fully funded upfront, which is more favorable than other rated RPL securitizations.
The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary, “Baseline Macroeconomic Scenarios for Rated Sovereigns: June 2023 Update,” published June 30, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.
The ratings reflect transactional strengths that include the following:
-- Low loan-to-value ratios.
-- Satisfactory third-party due-diligence review.
-- Structural features.
The transaction also includes the following challenges:
-- Delinquent loans.
-- R&W standard.
-- No servicer advances of delinquent P&I.
-- Assignments and endorsements.
The full description of the strengths, challenges, and mitigating factors is detailed in the related report.
DBRS Morningstar’s credit ratings on the Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated Notes are the related Interest Payment Amounts and the related Class Balances.
DBRS Morningstar’s credit rating on the Class A-1 Notes also addresses the credit risk associated with the increased rate of interest applicable to the Class A-1 Notes if the Class A-1 Notes remain outstanding on the Step-Up Date (as defined in and) in accordance with the applicable transaction document(s).
DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.
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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).
All figures are in U.S. dollars unless otherwise noted.
The principal methodology applicable to the credit 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.
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.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit 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.
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The credit 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 (June 9, 2023),
-- 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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