DBRS Morningstar Finalizes Provisional Credit Ratings on PRPM 2023-RCF2, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional credit ratings on the Asset-Backed Notes, Series 2023-RCF2 (the Notes) issued by PRPM 2023-RCF2, LLC (PRPM 2023-RCF2 or the Trust) as follows:

-- $122.9 million Class A-1 at AAA (sf)
-- $14.9 million Class A-2 at AA (sf)
-- $14.5 million Class A-3 at A (sf)
-- $11.7 million Class M-1 at BBB (sf)
-- $7.4 million Class M-2 at BB (high) (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 39.20% of credit enhancement provided by subordinated notes. The AA (sf), A (sf), BBB (sf), and BB (high) (sf) ratings reflect 31.85%, 24.70%, 18.90%, and 15.25% 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 and seasoned, performing and reperforming, first-lien residential mortgages, funded by the issuance of mortgage-backed notes (the Notes). The Notes are backed by 657 loans with a total principal balance of $202,129,585 as of the Cut-Off Date (September 30, 2023).

DBRS Morningstar calculated the portfolio to be approximately 25 months seasoned on average, though the age of the loans is quite dispersed, ranging from three months to 245 months. The majority of the loans (93.0%) had origination guideline or document deficiencies, which prevented such loans from being sold to Fannie Mae, Freddie Mac, or another purchaser, and the loans were subsequently put back to the sellers. In its analysis, DBRS Morningstar assessed such defects and applied certain penalties, consequently increasing expected losses on the mortgage pool.

Fairway Independent Mortgage Corp. (Fairway) originated 25.0% of the pool, majority with guideline or document deficiencies. The remaining originators each comprised less than 10.0% of the pool.

In the portfolio, 10.2% of the loans are modified. The modifications happened less than two years ago for 80.4% of the modified loans. Within the portfolio, 15 mortgages have non-interest-bearing deferred amounts, equating to 0.2% of the total unpaid principal balance (UPB). Unless specified otherwise, all statistics on the mortgage loans in this report are based on the current UPB, including the applicable non-interest-bearing deferred amounts.

Based on Issuer-provided information, certain loans in the pool (10.7%) are not subject to or exempt from the Consumer Financial Protection Bureau's (CFPB) Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because of seasoning or because they are business purpose loans. The loans subject to the ATR rules are designated as QM Safe Harbor (81.2%), QM Rebuttable Presumption (2.4%), and Non-QM (5.8%) by UPB.

As the Sponsor, PRP-LB V, LLC or one of its majority-owned affiliates will acquire and retain a 5% interest in aggregate fair value of the Notes and the membership certificate representing the initial overcollateralization amount to satisfy the credit risk retention requirements.

PRPM 2023-RCF2 is the second scratch & dent rated securitization for the Issuer with mostly newly originated collateral. The Sponsor has securitized many rated and unrated transactions under the PRPM shelf, most of which have been seasoned, reperforming, and nonperforming securitizations.

SN Servicing Corporation (SNSC; 94.7%) and Fay Servicing, LLC (Fay Servicing; 5.3%) will act as the Servicers of the loans.

The Servicers will not advance any delinquent principal and interest (P&I) on the mortgages; however, the Servicers are 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.

The Issuer has the option to redeem the Notes in full at a price equal to the sum of (1) the remaining aggregate Note Amount; (2) any accrued and unpaid interest due on the Notes through the redemption date (including any Cap Carryover); and (3) any fees and expenses of the transaction parties, including any unreimbursed servicing advances (Redemption Price). Such Optional Redemption may be exercised on or after the payment date in November 2025.

Additionally, a failure to pay the Notes in full by the Payment Date in October 2028 will trigger a mandatory auction of the underlying certificates. If the auction fails to elicit sufficient proceeds to make-whole the Notes, another auction will follow every four months for the first year, and subsequently auctions will be carried out every six months. If the Asset Manager fails to conduct the auction, holder of more than 50% of the Class M-2 Notes will have the right to appoint an auction agent to conduct the auction.

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 and any Cap Carryover amount to the Notes sequentially and then to pay Class A-1 until reduced to zero, which may provide for timely payment of interest on 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 a Credit Event, except for remaining available funds representing net sales proceeds of the mortgage loans. 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. Beginning on the Payment Date in November 2027, the Class A-1 and the other offered Notes will be entitled to its initial Note Rate plus the step-up note rate of 1.00% per annum. If the Issuer does not redeem the rated Notes in full by the payment date in July 2029 or an Event of Default occurs and is continuing, a Credit Event will have occurred. Upon the occurrence of a Credit Event, accrued interest on the Class A-2 and the other offered Notes will be paid as principal to the Class A-1 Notes until it has been paid in full. The redirected amounts will be paid as principal to the respective Notes.

The ratings reflect transactional strengths that include the following:

-- Collateral Credit Quality,
-- Structural Features,
-- Current Delinquency Status, and
-- Third-Party Due-Diligence Review.

The transaction also includes the following challenges:

-- Loans Originated Outside of Fannie Mae, Freddie Mac, or Investor Guidelines,
-- Representations and warranties (R&W) standard,
-- Assignments and Endorsements, 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 Interest Payment Amount, Cap Carryover Amount, and Note Amount.

DBRS Morningstar’s credit rating on the Notes also addresses the credit risk associated with the increased rate of interest applicable to the Notes if the Notes are not redeemed on the Expected Redemption 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

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

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

Governance (G) Factors
There were no Governance factors 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 (4 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 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 (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.
140 Broadway, 43rd Floor
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].