Morningstar DBRS Finalizes Provisional Credit Ratings on PRKCM 2024-AFC1 Trust

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on Mortgage-Backed Notes, Series 2024-AFC1 (the Notes issued by PRKCM 2024-AFC1 Trust (the Trust or the Issuer):

-- $205.1 million Class A-1 at AAA (sf)
-- $32.4 million Class A-2 at AA (high) (sf)
-- $35.6 million Class A-3 at A (high) (sf)
-- $15.8 million Class M-1 at BBB (sf)
-- $11.7 million Class B-1 at BB (sf)
-- $8.8 million Class B-2 at B (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 34.90% of credit enhancement provided by subordinate Notes. The AA (high) (sf), A (high) (sf), BBB (sf), BB (sf), and B (sf) credit ratings reflect 24.60%, 13.30%, 8.30%, 4.60%, and 1.80% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate, expanded prime and nonprime, primarily first-lien (99.8%) residential mortgages funded by the issuance of the Mortgage-Backed Notes, Series 2024-AFC1 (the Notes). The Notes are backed by 871 mortgage loans with a total principal balance of $316,079,251 as of the Cut-Off Date (February 1, 2024). Unless specified otherwise, all the statistics regarding the mortgage loans in this report are based on the Presale Report balance.

This is the ninth securitization by the Sponsor, Park Capital Management Sponsor LLC, an affiliate of AmWest Funding Corp. (AmWest). AmWest is the Seller, Originator, and Servicer of the mortgage loans.

The pool is about two month seasoned on a weighted-average (WA) basis; although, seasoning spans from zero to 6 months.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) and Ability-to-Repay (ATR) rules where applicable, 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 QM/ATR rules, approximately 16.6% of the loans are designated as non-QM. Approximately 17.1% of the loans are designated as QM Safe Harbor and approximately 10.3% are designated as QM Rebuttable Presumption.

Approximately 55.9% of the loans are made to investors for business purposes and, hence, are not subject to the QM/ATR rules. The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on the property-level cash flows for approximately 31.1% of the loans, primarily the asset value for 8.4% of the loans, and mortgagor’s credit profile and debt-to-income ratio, property value, and the available assets, where applicable, for approximately 16.6% of the loans. Since the loans were made to investors for business purposes, they are exempt from the CFPB ATR rules and Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule.

For investor loans originated to investors under debt service coverage ratio (DSCR) programs (31.1% of the pool), lenders use property-level cash flow or the DSCR to qualify borrowers for income. The DSCR is typically calculated as market rental value (validated by an appraisal report) divided by the principal, interest, taxes, insurance, and association dues (PITIA).

Also, approximately 8.4% of the pool comprises residential investor loans underwritten to the property focused underwriting guidelines. The loans were underwritten to program guidelines for business-purpose loans where the lender generally expects the property (or its value) and the borrower assets to be the primary source of repayment. The lender reviews the mortgagor's credit profile, though it does not rely on the borrower's income to make its credit decision.

In addition, the pool contains five temporary buy-down mortgage loans (approximately 0.7%). The initial 24 monthly payments made by the borrowers for their respective loans will be less than their scheduled payments due to the trust, with the difference (for each borrower) compensated from funds held in a related account funded by the seller of the mortgaged property, the mortgage originator, or another party. The funds are not eligible for use to offset potential missed payments; however, if a loan is prepaid in full during its buy-down period, any remaining related funds will be credited to the related borrower.

For this transaction, the Servicer will fund advances of delinquent principal and interest (P&I) until loans become 90 days delinquent or are otherwise deemed unrecoverable. Additionally, the Servicer is obligated to make advances with respect to taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (Servicing Advances). If the Servicer fails in its obligation to make P&I advances, the Master Servicer (Nationstar Mortgage LLC) will be obligated to fund such advances. In addition, if the Master Servicer fails in its obligation to make P&I advances, Citibank, N.A. (rated AA (low) with a Stable trend by Morningstar DBRS) as the Paying Agent, will be obligated to fund such advances. The Master Servicer and Paying Agent are only responsible for P&I Advances; the Servicer is responsible for P&I Advances and Servicing Advances.

The Sponsor, directly or indirectly through a majority-owned affiliate, is expected to retain an eligible horizontal residual interest consisting of the Class B-3 Notes and Class XS Notes, collectively representing at least 5% of the 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.

On any date on or after the earlier of (1) the payment date occurring in February 2027 or (2) on or after the payment date when the aggregate stated principal balance of the mortgage loans is reduced to less than or equal to 20% of the Cut-Off Date balance, the Sponsor may terminate the Issuer (Optional Termination) by purchasing the loans, any real estate owned (REO) properties, and any other property remaining in the Issuer at the optional termination price, specified in the transaction documents. After such a purchase, the Sponsor will have to complete 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 Controlling Holder in the transaction is a majority holder (or majority holders if there is no single majority holder) of the outstanding Class XS Notes, initially, the Seller. The Controlling Holder will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent under the Mortgage Banker Association (MBA) Method at the repurchase price (par plus interest), provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

The transaction employs a sequential-pay cash flow structure with a pro rata principal payment among the Class A-1, A-2, and A-3 Notes (senior classes of Notes) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Credit Event). Also, principal proceeds can be used to cover interest shortfalls on the senior classes of Notes (IIPP) before being applied sequentially to amortize the balances of the Notes. For the Class A-3 Notes (only after a Credit Event) and for the mezzanine and subordinate classes of notes, principal proceeds can be used to cover interest shortfalls after the more senior tranches are paid 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 A-3 Notes. Of note, the interest and principal otherwise available to pay the Class B-3 Notes interest and interest shortfalls may be used to pay the Class A coupons' Cap Carryover Amounts on any payment date.

The credit ratings reflect transactional strengths that include the following:

-- Improved underwriting standards;
-- Robust loan attributes and pool composition;
-- Compliance with the ATR Rules; and,
-- Satisfactory third-party due-diligence review.

The transaction also includes the following challenges:

-- Alternative documentation loans and loans to self-employed borrowers;
-- Non-Prime, Non-QM, and Investor Loans; and,
-- Representations and Warranties (R&W) framework.

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 Interest Payment Amount, any Interest Carryforward Amount, and the Note Amount.

Morningstar DBRS’ credit ratings on the Class A-1, Class A-2, and Class A-3 Notes also address the credit risk associated with the increased rate of interest applicable to the Class A-1, Class A-2, and Class A-3 Notes if the Class A-1, Class A-2, and Class A-3 Notes remain outstanding on the step-up date (March 2028) in accordance with the applicable transaction document(s).

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 Cap Carryover Amount.

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.

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 (February 26, 2024),
https://dbrs.morningstar.com/research/428623

-- 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.