DBRS, Inc. (DBRS Morningstar) assigned provisional credit ratings to the following Asset-Backed Securities, Series 2023-FIG4 (the Notes) to be issued by Saluda Grade Alternative Mortgage Trust 2023-FIG4 (GRADE 2023-FIG4 or the Issuer):
-- $289.0 million Class A Notes at AAA (sf)
-- $31.6 million Class B Notes at A (low) (sf)
-- $20.4 million Class C Notes at BBB (low) (sf)
The AAA (sf) credit rating on the Class A Notes reflects 23.55% of credit enhancement provided by subordinate notes. The A (low) (sf) and BBB (low) (sf) credit ratings reflect 15.20% and 9.80% 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 5,406 loans (individual HELOC draws), which correspond to 5,052 HELOC families (each consisting of an initial HELOC draw and subsequent draws by the same borrower) with a total unpaid principal balance (UPB) of $378,057,143 and a total current credit limit of $406,172,826 as of the Cut-Off Date (November 30, 2023).
The portfolio, on average, is four months seasoned, though seasoning ranges from one to 31 months. All the HELOCs are current and 99.8% have never been 30 or more (30+) days delinquent since origination. All the loans in the pool are exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because HELOCs are not subject to the ATR/QM rules.
GRADE 2023-FIG4 represents the fourth Figure Lending LLC (Figure) HELOC securitization by the Sponsor, Saluda Grade Opportunities Fund LLC (Saluda Grade). Figure is the Loan Seller of the transaction, the Originator of most of the HELOCs in the pool (48.8%), and the Servicer of all the loans. Figure-originated HELOCs are included in two unrated securitizations (GRADE 2020-FIG1 and GRADE 2021-FIG2) and one rated securitization (GRADE 2023-FIG3) sponsored by Saluda Grade, and three securitizations (FLOC 2020-1, FIGRE 2023-HE1, and FIGRE 2023-HE2) sponsored by Figure. These transactions’ performance to date is satisfactory.
Figure 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.
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. After the draw term, HELOC borrowers have a repayment period ranging from three to 25 years and are no longer allowed to draw. During the draw period and the repayment period, the outstanding principal balance is fully amortized over the remaining term of the HELOC. All HELOCs in this transaction are fixed-rate loans with no interest-only payment periods, and 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 97.2% after four months 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 traditional HELOCs, 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 terms.
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 presale report for details.
TRANSACITON AND OTHER COUNTERPARTIES
In addition to the Figure-originated HELOCs, the mortgages were originated by Homebridge Financial Services, Inc. and its affiliates (20.4%) as well as other originators (together, the White Label Partner Originators), each comprising less than 10.0% of the pool by balance. The White Label Partner Originators originated HELOCs using Figure's online origination applications under Figure’s underwriting guidelines.
Figure will service all loans within the pool for a servicing fee of 0.25% per year. Figure services HELOC loans until they become 60 days delinquent or other circumstances arise that require special handling including bankruptcy, initiation of foreclosure on the senior lien, or litigation, at which time they are transferred to the special servicer, Specialized Loan Servicing LLC.
Wilmington Savings Fund Society, FSB (WSFS Bank) will serve as the Indenture Trustee, Paying Agent, Note Registrar, and Certificate Registrar. WSFS Bank will also serve as the Custodian and the Delaware Trustee.
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 G 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 G Certificateholder after the Closing Date).
The Reserve Account is funded at closing initially with a rounded balance of $1,512,229 (0.40% of the aggregate UPB as of the Cut-Off Date). Prior to the payment date in January 2029, the Reserve Account Required Amount will be 0.40% of the aggregate UPB as of the Cut-Off Date. On and after the payment date in January 2029 (after the draw period ends for all HELOCs), the Reserve Account Required Amount will become $0, at which point the funds will be released through the transaction waterfall. If the Reserve Account is not at the Reserve Account Required Amount, the Class G 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 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 collections in subsequent collection periods. Saluda Grade, as a holder of the Class G 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 G Certificates' balance will be increased by the amount of any Net Draws funded by the Class G Certificateholder.
In its analysis of the proposed transaction structure, DBRS Morningstar does not rely on the creditworthiness of either the Servicer or Saluda Grade. 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.
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 Mortgage Bankers Association delinquency method will be charged off.
The transaction employs a pro rata cash flow structure subject to a Credit Event, which is based on certain performance trigger events related to cumulative losses, delinquencies, and excess spread. If a Credit Event is in effect, principal distributions are made sequentially.
The Net WA Coupon Trigger Event, which was present in the previous transaction GRADE 2023-FIG3, has been replaced by the Excess Spread Trigger Event in GRADE 2023-FIG4. The Excess Spread Trigger Event is occurring on any payment date on or after the payment date in September 2024 (after the first nine payment dates), when the excess spread, as described in the Cash Flow Structure and Features section of this report, does not exceed 4.35%. The Cumulative Loss and Delinquency Trigger Events are applicable immediately after the Closing Date.
Relative to a sequential pay structure, a pro rata structure subject to a 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 class principal balance of the Class CE Notes will equal the overcollateralization (OC) amount; represented on any payment date by the excess, if any, of (A) the aggregate UPB of the loans over (B) the aggregate class principal balances of the Class A, B, and C Notes and Class G Certificates outstanding. The class principal balance of the Class CE Notes is subject to an OC floor of 1.00% of the Cut-Off Date UPB of the loans and will not exceed the original class principal balance of the Class CE Notes (about 9.80% of the Cut-Off Date UPB of the loans). Principal can be paid to Class CE in reduction of its class principal balance so long as the Minimum OC Trigger Event is not occurring. Please see the Cash Flow Structure and Features section of the presale report for more details.
OTHER TRANSACTION FEATURES
The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest consisting of 5% of each class of Notes to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. The required credit risk must be held 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.
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 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.
On any date when the total UPB of the loans falls to or below 20% of the Cut-Off Date UPB, the Issuer, at the direction of the Controlling Holder, may exercise a call and purchase all of the outstanding Notes at the redemption price (Optional Redemption) described in the transaction documents.
The credit ratings reflect transactional strengths that include the following:
-- Certain HELOC attributes,
-- Robust equity and prime and near-prime credit quality,
-- Current loan status
-- Improved structural features, and
-- Satisfactory third-party due-diligence sample size and compliance review.
The transaction also includes the following challenges:
-- Holder of the Class G 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.
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 the rated notes are the Interest Payment Amount and the Class Principal Balance.
DBRS Morningstar’s credit ratings do not address nonpayment 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 credit ratings do not address the payment of any Cap Carryover Amount based on its position 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.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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).
All figures are in U.S. dollars unless otherwise noted.
The principal methodology applicable to the credit rating is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023; https://www.dbrsmorningstar.com/research/420108).
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.
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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),
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023),
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023),
-- Legal Criteria for U.S. Structured Finance (December 7, 2023),
-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023),
-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023),
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