DBRS Morningstar Assigns Provisional Ratings to Verus Securitization Trust 2023-INV3

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following Mortgage-Backed Notes, Series 2023-INV3 (the Notes) to be issued by Verus Securitization Trust 2023-INV3:

-- $206.5 million Class A-1 at AAA (sf)
-- $39.3 million Class A-2 at AA (high) (sf)
-- $44.9 million Class A-3 at A (high) (sf)
-- $31.9 million Class M-1 at BBB (sf)
-- $21.2 million Class B-1 at BB (low) (sf)
-- $10.3 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 44.60% of credit enhancement provided by subordinate notes. The AA (high) (sf), A (high) (sf), BBB (sf), BB (low) (sf), and B (sf) ratings reflect 34.05%, 22.00%, 13.45%, 7.75%, and 5.00% of credit enhancement, respectively.

Other than the classes specified above, DBRS Morningstar does not rate any other classes in this transaction.
This transaction is a securitization of a portfolio of fixed- and adjustable-rate, investor debt service coverage ratio (DSCR), first-lien residential mortgages funded by the issuance of the Mortgage-Backed Notes, Series 2023-INV3 (the Notes). The Notes are backed by 1,050 mortgage loans with a total principal balance of $372,729,912 as of the Cut-Off Date (November 1, 2023).

VERUS 2023-INV3 represents the eleventh securitization issued by the Sponsor (VMC Asset Pooler, LLC) or a related Invictus Capital Partners, LP (Invictus) entity, backed entirely by business purpose investment loans, predominantly underwritten using DSCR. The originators for the mortgage pool are Hometown Equity Mortgage, LLC (22.9%) and other originators, each comprising less than 10.0% of the mortgage loans. Newrez LLC doing business as Shellpoint Mortgage Servicing (100%) is the servicer of the loans in this transaction.

The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and the DSCR, where applicable. Because the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) rules and TILA/RESPA Integrated Disclosure rule.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible horizontal interest consisting of the Class B-3 and XS Notes representing at least 5% of the aggregate fair value 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. Such retention aligns Sponsor and investor interest in the capital structure.

Nationstar Mortgage LLC d/b/a 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. (rated BBB with a Stable trend by DBRS Morningstar) and Deutsche Bank National Trust Company will act as the Custodian.

On or after the earlier of (1) the Payment Date occurring in November 2026 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 Note Owner(s) representing 50.01% or more of the Class XS Notes (Optional Redemption Right Holder), 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) the 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 Advancing Party or Servicer has no obligation to advance P&I on a mortgage approved for a forbearance plan during its related forbearance period. The Servicers, however, are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the Class A-1, Class A-2, and Class A-3 Notes (Senior Classes) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). After a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 Notes (IIPP) before being applied sequentially to amortize the balances of the notes. 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 Class A-3. The Class A-1, Class A-2, and Class A-3 fixed rate coupons step up by 1.00% on and after the payment date in December 2027 (step-up date). Of note, on and after the distribution date in December 2027, interest and principal otherwise available to pay the Class B-3 interest and interest shortfalls may be used to pay any Class A Cap Carryover amounts.

The ratings reflect transactional strengths that include the following:

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

The transaction also includes the following challenges:

-- 100% investor loans,
-- Three-month advances of delinquent P&I,
-- Representations and warranties framework, and
-- Advancing Party's Financial Capability.

The full description of the strengths, challenges, and mitigating factors is detailed in the related report.

DBRS Morningstar’s credit rating on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this Press Release. The associated financial obligations for each of the rated Notes are the Interest Payment Amount, any Interest Carryforward Amount, and the related Note Amount.

DBRS Morningstar’s credit ratings on Classes A-1, A-2, and A-3 also address the credit risk associated with the increased rate of interest applicable to these Notes if they remain outstanding on the step-up date (December 2027) in accordance with the applicable transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, in this transaction, DBRS Morningstar's ratings do not address the payment of any cap carryover amounts.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784 .

Notes:
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 (August 31, 2023; https://www.dbrsmorningstar.com/research/420108).

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/421227.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating process.

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

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; https://www.dbrsmorningstar.com/research/413297)

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023; https://www.dbrsmorningstar.com/research/420333)

-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023; https://www.dbrsmorningstar.com/research/414076)

-- Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023; https://www.dbrsmorningstar.com/research/420106)

-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023; https://www.dbrsmorningstar.com/research/420107)

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