Morningstar DBRS Finalizes Provisional Credit Ratings on Towd Point Mortgage Trust 2024-CES2

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following Mortgage-Backed Notes, Series 2024-CES2 (the Notes) issued by Towd Point Mortgage Trust 2024-CES2 (TPMT 2024-CES2 or the Trust):

-- $309.1 million Class A1A at AAA (sf)
-- $3.9 million Class A1B at AAA (sf)
-- $25.1 million Class A2 at AA (high) (sf)
-- $17.4 million Class M1 at A (high) (sf)
-- $14.7 million Class M2 at BBB (high) (sf)
-- $10.0 million Class B1 at BB (high) (sf)
-- $5.2 million Class B2 at B (high) (sf)
-- $313.0 million Class A1 at AAA (sf)
-- $25.1 million Class A2A at AA (high) (sf)
-- $25.1 million Class A2AX at AA (high) (sf)
-- $25.1 million Class A2B at AA (high) (sf)
-- $25.1 million Class A2BX at AA (high) (sf)
-- $25.1 million Class A2C at AA (high) (sf)
-- $25.1 million Class A2CX at AA (high) (sf)
-- $25.1 million Class A2D at AA (high) (sf)
-- $25.1 million Class A2DX at AA (high) (sf)
-- $17.4 million Class M1A at A (high) (sf)
-- $17.4 million Class M1AX at A (high) (sf)
-- $17.4 million Class M1B at A (high) (sf)
-- $17.4 million Class M1BX at A (high) (sf)
-- $17.4 million Class M1C at A (high) (sf)
-- $17.4 million Class M1CX at A (high) (sf)
-- $17.4 million Class M1D at A (high) (sf)
-- $17.4 million Class M1DX at A (high) (sf)
-- $14.7 million Class M2A at BBB (high) (sf)
-- $14.7 million Class M2AX at BBB (high) (sf)
-- $14.7 million Class M2B at BBB (high) (sf)
-- $14.7 million Class M2BX at BBB (high) (sf)
-- $14.7 million Class M2C at BBB (high) (sf)
-- $14.7 million Class M2CX at BBB (high) (sf)
-- $14.7 million Class M2D at BBB (high) (sf)
-- $14.7 million Class M2DX at BBB (high) (sf)

Other than the specified classes above, Morningstar DBRS does not rate any other classes in this transaction.

The AAA (sf) credit rating on the Notes reflects 19.00% of credit enhancement provided by subordinate Notes. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (high) (sf) credit ratings reflect 12.50%, 8.00%, 4.20%, 1.60%, and 0.25% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed, prime and near-prime, closed-end second-lien (CES) residential mortgages funded by the issuance of the Notes. The Notes are backed by 5,311 mortgage loans with a total principal balance of $391,031,984 as of the Statistical Calculation Date (December 31, 2023).

The portfolio, on average, is three months seasoned, though seasoning ranges from zero to 24 months. Borrowers in the pool represent prime and near-prime credit quality—weighted-average Morningstar DBRS-calculated FICO score of 738, Issuer-provided original combined loan-to-value ratio (CLTV) of 68.6%, 100% originated with Issuer-defined full documentation. All the loans are current and have never been delinquent since origination.

TPMT 2024-CES2 represents the fourth FirstKey Mortgage, LLC and first by CRM 1 Sponsor, LLC. Spring EQ, LLC (43.8%) and Rocket Mortgage, LLC (Rocket; 38.7%) are the top originators for the mortgage pool. The remaining originators each comprise less than 15.0% of the mortgage loans.

Specialized Loan Servicing LLC (54.5%), Rocket (38.7%), and Nationstar Mortgage LLC doing business as Mr. Cooper (6.8%) are the Servicers of the loans in this transaction.

U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by Morningstar DBRS) will act as the Indenture Trustee, Note Registrar, and Administrator. U.S. Bank National Association and Computershare Trust Company, N.A. (rated BBB with a Stable trend by Morningstar DBRS) will act as the Custodians.

CRM 1 Sponsors, LLC (CRM) will acquire the loans from various transferring trusts on the Closing Date. The transferring trusts acquired the mortgage loans from the Originators. CRM and the transferring trusts are beneficially owned by funds managed by affiliates of Cerberus Capital Management, L.P. Upon acquiring the loans from the transferring trusts, the CRM, through a wholly owned subsidiary, CRM 1 Depositor, LLC (the Depositor), will contribute loans to the Trust. As the Sponsor, CRM, through one or more majority-owned affiliates, will acquire and retain a 5% eligible vertical interest in each class of securities to be issued (other than any residual certificates) to satisfy the credit risk retention requirements.

On or after the earlier of (1) the Payment Date occurring in February 2027 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 Administrator, at the Optional Redemption Right Holder's option, 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 (REO) properties. After such purchase, the Depositor must complete a qualified liquidation, which requires (1) a complete liquidation of assets within the Trust and (2) proceeds to be distributed to the appropriate holders of regular or residual interests.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the Qualified Mortgage (QM)/ATR rules, 23.2% of the loans are designated as non-QM, 19.7% are designated as QM Rebuttable Presumption, and 45.8% are designated as QM Safe Harbor. Approximately 11.3% of the mortgages are loans made to investors for business purposes or were originated by a Community Development Financial Institution designated originator and were not subject to the QM/ATR rules.

There will not be any advancing of delinquent principal or interest on any mortgages by the Servicers or any other party to the transaction. In addition, the related servicer is not obligated to make advances in respect of homeowner association fees, taxes, and insurance, installment payments on energy improvement liens, and reasonable costs and expenses incurred in the course of servicing and disposing of properties unless a determination is made that there will be material recoveries.

For this transaction, any loan that is 150 days delinquent under the Office of Thrift Supervision delinquency method (equivalent to 180 days delinquent under the Mortgage Bankers Association delinquency method), upon review by the related Servicer, may be considered a Charged Off Loan. With respect to a Charged Off Loan, the total unpaid principal balance will be considered a realized loss and will be allocated reverse sequentially to the Noteholders. If there are any subsequent recoveries for such Charged Off Loans, the recoveries will be included in the principal remittance amount and applied in accordance with the principal distribution waterfall; in addition, any class principal balances of Notes that have been previously reduced by allocation of such realized losses may be increased by such recoveries sequentially in order of seniority. Morningstar DBRS’ analysis assumes reduced recoveries upon default on loans in this pool.

This transaction incorporates a sequential-pay cash flow structure with a pro rata principal distribution among the senior A1A and A1B tranches.. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class M1 and more subordinate bonds will not be paid from principal proceeds until the Class A1A, A1B, and A2 Notes are retired.

On or after (1) the payment date in February 2027 or (2) the first payment date when the aggregate pool balance of the mortgage loans (other than the Charged Off Loans and the REO properties) is reduced to less than 30.0% of the Cut-Off Date balance, the call option holder will have the option to purchase all of the mortgage loans and the REO properties so long as the aggregate proceeds from such purchase exceeds the minimum price (Optional Redemption).

On or after the first payment date on which the aggregate pool balance of the mortgage loans and the REO properties is less than 10% of the aggregate pool balance as of the Cut-off Date, the call option holder will have the option to purchase all the remaining mortgage loans, REO properties, and other property of the Issuer at the minimum price (Clean-Up Call).

The transaction assumptions consider Morningstar DBRS’ baseline macroeconomic scenarios for rated sovereign economies, available in its commentary ”Baseline Macroeconomic Scenarios for Rated Sovereigns: December 2023 Update,” published on December 19, 2023. These baseline macroeconomic scenarios replace Morningstar DBRS’ moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

The credit ratings reflect transactional strengths that include the following:

-- Robust equity and prime/near-prime credit quality;
-- Certain second-lien attributes;
-- Satisfactory third-party due-diligence review;
-- Current loan status; and
-- Improved underwriting standards.

The transaction also includes the following challenges:

-- Representations and warranties framework;
-- No servicer advances of delinquent principal and interest; and
-- Limited third-party diligence valuation review.

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

Morningstar DBRS’ 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 Current Interest, Interest Shortfall, and the related Class Principal Balance.

Morningstar DBRS' 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, Morningstar DBRS' credit ratings do not address the payment of any Net WAC Shortfall based on its position in the cash flow waterfall.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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://dbrs.morningstar.com/research/420108.

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

Morningstar DBRS materially deviated from its principal methodology when determining the credit ratings assigned to all rated classes by deriving probability of default for this pool by using the first-lien module (at the CLTV level) of its RMBS Insight model. The material deviation is warranted given that the CES module of Morningstar DBRS’ proprietary RMBS Insight model is developed using pre-crisis CES mortgage and performance data, which does not give credit to certain collateral attributes and improved underwriting, and therefore may not be applicable for post-crisis CES loans.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (April 28, 2023),
https://dbrs.morningstar.com/research/413297
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://dbrs.morningstar.com/research/415687
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023),
https://dbrs.morningstar.com/research/420333
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023),
https://dbrs.morningstar.com/research/414076
-- Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://dbrs.morningstar.com/research/425081
-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023),
https://dbrs.morningstar.com/research/420106
-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023),
https://dbrs.morningstar.com/research/420107

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.