DBRS Morningstar Finalizes Provisional Credit Ratings on PRMI Securitization Trust 2023-CMG1

DBRS, Inc. (DBRS Morningstar) finalized its provisional credit ratings on the Mortgage-Backed Notes, Series 2023-CMG1 (the Notes) issued by PRMI Securitization Trust 2023-CMG1 (PRMI 2023-CMG1 or the Trust) as follows:

-- $256.1 million Class A-1 at AAA (sf)
-- $25.1 million Class A-2 at AA (sf)
-- $22.4 million Class A-3 at A (sf)
-- $7.9 million Class M-1 at BBB (sf)
-- $4.8 million Class B-1 at BB (sf)
-- $2.1 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 20.50% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) ratings reflect 12.70%, 5.75%, 3.30%, 1.80%, and 1.15% 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 a portfolio of newly originated, performing, adjustable-rate, fully amortizing, interest-only (IO), open-ended, revolving first-lien line of credit (LOC) loans funded by the issuance of the Notes. The Notes are backed by 772 LOC loans with a total unpaid principal balance (UPB) of $322,086,941 and a total current credit limit of $405,817,136 as of the Cut-Off Date (September 30, 2023).

The portfolio, on average, is seven months seasoned, though seasoning ranges from one to 25 months. Approximately 98.9% of the LOC loans have been performing since origination. All of the loans in the pool are first-lien LOCs evidenced by promissory notes secured by mortgages or deeds of trust or other instruments creating first liens on one- to four-family residential properties, planned unit development, townhouses and condominiums.

CMG Mortgage, Inc. (CMG) or CMG-qualified correspondents are the Originators of all LOC loans in the pool. CMG is a wholly owned subsidiary of CMG Financial Services, Inc., a privately held company that was founded in 1993 as CMG Mortgage, Inc. The company originates conventional, government, and jumbo mortgages. CMG also originates first-lien LOC loans to prime borrowers under the All-In-One loan program, which offers borrowers convenient cash management features and an opportunity to reduce the interest charges and accelerate principal repayment.

The transaction’s Sponsor is PRMI Capital Markets LLC, an affiliate of the PR Mortgage Investment, LP (PRMI or the Fund). PRMI, a leveraged debt fund that specializes in real estate related assets, commenced operations in 2019. The Fund’s general partner is PRMIGP, LLC, and the investment manager is PR Mortgage Investment Management, LLC. B3 LLC, composed of three senior investment executives, holds a majority interest in the Fund’s general partner and investment manager, and Merchants Bancorp, the holding company of Merchants Bank of Indiana (MBIN), holds a minority interest in the general partner and investment manager, and is also a limited partner in the Fund. MBIN is a publicly traded bank with approximately $16.5 billion in assets.

The transaction is the second securitization of LOC loans by the Sponsor. Previously, the Fund sponsored a securitization of the prime agency-eligible mortgage loans rated by two credit rating agencies, PRMI Securitization Trust 2021-1, demonstrating robust performance to date.

In this transaction, all loans originated under the All-In-One program are open-LOCs, with a draw period of 25 or 30 years during which borrowers may make draws up to a credit limit, though such right to make draws may be temporarily frozen in certain circumstances. A 25 or 30-year draw period offers borrower flexibility to draw funds over the life of the loan. However, the total credit line amount (or credit limit) begins to decline after remaining constant for the first 10 years. Thereafter, the credit limit declines every payment period by a monthly amortization amount required to pay off the loan at maturity or 1/240th of the maximum capacity of the credit line (limit reduction amount). As such, even if a borrower redraws the amount to a limit at some point in the future, the limit is lowered to match the amount that could be repaid at maturity using the required monthly payments.

All of the LOC loans in this transaction have 10-year IO terms (IO payment period), so borrowers are required to make IO payments within the IO payment period and both interest and principal payments during and repayment period. No loans require a balloon payment.

Although LOC loans include a 10-year IO term, the borrowers are qualified for income using, among other measures, a debt-to-income ratio calculated with a fully indexed interest rate and assuming principal amortization over 360 periods (as if the borrower is required to make principal payments during the IO payment period).

Relative to other types of HELOCs backing DBRS Morningstar-rated deals, the loans in the pool generally have high borrower credit scores, are all in a first-lien position, and do not include balloon payments. The relatively long IO period and income qualification based on the fully amortized payment amount help ensure the borrower has enough cushion to absorb increased payments after the IO term expires. Also, the lack of balloon payment allows borrowers to avoid the payment shock that typically occurs when a balloon payment is required.

On or prior to the Closing Date, CMG will sell 685 loans (approximately 86.4% of the pool by balance as of the Cut-Off Date), including the servicing rights with respect thereto, to the Seller (PRMI Trust). Also, MBIN will sell 87 loans (approximately 13.6% by balance) originated by CMG and previously acquired by MBIN to the Seller. These loans (Merchants Mortgage Loans) will be sold excluding the servicing rights thereto, which will be retained by CMG as the Servicing Rights Owner. The PRMI Mortgage Loans and the Merchants Mortgage Loans are collectively referred to as the mortgage loans or LOC loans in the report.

Northpointe Bank (Northpointe), a Michigan-chartered bank, is the Servicer of all loans in the pool. The initial annual servicing fee is 0.25% per year. U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will serve as the Custodian. U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by DBRS Morningstar) will serve as the Indenture Trustee, Paying Agent, and Note Registrar. U.S. Bank Trust National Association will serve as the Owner Trustee.

In accordance with U.S. credit risk retention requirements, the PR Mortgage Holdings I LLC, a majority-owned affiliate of the Sponsor, will acquire and intends to retain an “eligible horizontal residual interest,” representing not less than 5% economic interest in the transaction, to satisfy the requirements under Section 15G of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.

This transaction uses a structural mechanism similar to other comparable transactions to fund future draw requests. Assuming the funding of the subsequent draw is valid and required under the LOC agreement, the obligation to fund it falls originally on CMG as the lender under the LOC agreement. In addition, under the transaction documents, the Issuer will engage Northpointe, as the Servicer under the servicing agreement. Northpointe, as a servicer, will determine whether a borrower is entitled to the requested draw under the related LOC agreement and will fund any valid draw request.

The Servicer will be required to fund draws and will be entitled to reimburse itself for such draws prior to any payments on the Notes from the principal collections. If the aggregate draws exceed the principal collections (Net Draw), the Servicer is still obligated to fund draws even if principal collections and the reserve fund are insufficient in a given month for full reimbursement. In such cases, the Paying Agent will reimburse the Servicer first from amounts on deposit in the variable-funding account (VFA), and second, if the amounts available in the VFA are insufficient on the related payment date or future payment dates, then from the future principal collections.

The VFA is expected to have an initial balance of $100,000. The VFA required amount for each payment date will be $100,000. If the amount on deposit in the VFA is less than such required amount on a payment date, the Paying Agent will use excess cash flow (i.e., remaining amounts after covering losses and paying Cap Carryover Amounts) to deposit in the VFA. To the extent the VFA is not funded up to its required amount from excess cash flow, the holder of the Trust Certificates on behalf of the Class R Note will be required to use its own funds to make any deposits to the VFA or to reimburse the Servicer for any Net Draws. The balance of Trust Certificates will be increased by an amount deposited to the VFA used to reimburse the Servicer for the Net Draws (residual principal balance). The Trust Certificates, on behalf of the Class R Note, will be entitled to receive principal and the net interest that accrues on the residual principal balance at the Net WAC Rate. The holder of the Trust Certificate is permitted to finance these funding obligations by using the financing secured by the Trust Certificate with a third-party lender.

The Sponsor (PRMI Capital Markets LLC) or a majority-owned affiliate, as an expected holder of the Trust Certificates/Class R Note, will have ultimate responsibility to ensure draws are funded, as long as all borrower conditions are met to warrant draw funding.

In its analysis of the proposed transaction structure, DBRS Morningstar does not rely on the creditworthiness of either the Servicer or the Sponsor and relies solely on the issuer’s assets’ ability to generate sufficient cash flows to pay the transaction parties and bondholders. Please see the Cash Flow Analysis section of the related report for more details.

The transaction, based on a static pool, employs a modified sequential-pay cash flow structure with a pro rata principal distribution among the more senior tranches (Class A-1, A-2, and A-3 Notes) subject to a sequential priority trigger (Credit Event) related to cumulative losses or delinquencies exceeding a specified threshold. If a Credit Event is in effect, principal proceeds can be used to cover interest carryforward amount on the Class A-1 and Class A-2 Notes (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated notes. For the Class A-3 Notes (only after a Credit Event) and for the mezzanine and subordinate classes of notes (both before and after a Credit Event), principal proceeds will be available to cover interest carryforward amount only after the more senior notes have been paid off in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to Class B-3.

The Trust Certificates have a pro rata principal distribution with all senior and subordinate tranches while the Credit Event is not in effect. When the trigger is in effect, the Trust Certificates' principal distribution will be subordinated to both the senior and subordinate notes in the payment waterfall. While a Credit Event is in effect, realized losses will be allocated reverse sequentially starting with the Trust Certificates, followed by the Class B-3 Notes, and then continuing up to Class A-1 Notes based on their respective payment priority. While a Credit Event is not in effect, the losses will be allocated pro rata between the Trust Certificates and all outstanding notes based on their respective priority of payments. The outstanding notes will allocate realized losses reverse sequentially, beginning with Class B-3 up to Class A-1.

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 principal and interest (P&I) on any LOC loan. However, the Servicer is obligated 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 or holders of more than a 50% interest of the Class XS Notes; initially, the Depositor's affiliate).

All of the loans in the pool are exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because the LOC loans are not subject to the ATR/QM rules.

On or after the earlier of the (i) payment date in November 2026, and (ii) the date on which the aggregate principal balance of the mortgage loans is less than or equal to 30% of the aggregate principal balance as of the cut-off date, the Issuer may, at the direction of the holder of the Trust Certificates, purchase all of the loans and any real estate owned (REO) properties at an optional termination price described in the transaction documents. An Optional Termination will be followed by a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds to the appropriate holders of regular or residual interests. The Certificateholder may sell, transfer, convey, assign, or otherwise pledge the right to direct the Issuer to exercise the Optional Termination to a third party, in which case the right must be exercised by such third party, as described in the transaction documents.

On any payment date on or after the later of (1) the two-year anniversary of the Closing Date, and (2) the earlier of (a) the three-year anniversary of the Closing Date, and (b) the date on which the aggregate loans' principal balance is less than or equal to 30% of the Cut-Off Date balance, the Issuer may, at the direction of the holder of the Trust Certificates, purchase all of the outstanding Notes and the Trust Certificates at the purchase price in the transaction documents (Optional Redemption). An Optional Redemption will be followed by a qualified liquidation,

The Sponsor, at its option, may purchase any mortgage loan that is 90 days or more delinquent under the Mortgage Bankers Association 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 balance.

The ratings reflect transactional strengths that include the following:

-- Robust pool composition,
-- Robust recent payment histories,
-- Current loan status, and
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Holder of the Trust Certificates may fail to reimburse servicer for draws,
-- Representations and warranties standard, and
-- No servicer advances of delinquent P&I.

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 for the rated notes are the Current Interest, Interest Carryforward Amount, and Note Amount

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 based on their positions in the cash flow waterfall.

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. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant 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 (04 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in US 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 (31 August 2023) https://www.dbrsmorningstar.com/research/420108/rmbs-insight-1.3:-u.s.-residential-mortgage-backed-securities-model-and-rating-methodology

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-us-rmbs-originators)
-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023; https://www.dbrsmorningstar.com/research/420107/operational-risk-assessment-for-us-rmbs-servicers)

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