Morningstar DBRS Finalizes Provisional Credit Ratings on Grove Funding III Trust 2024-1

DBRS, Inc. (Morningstar DBRS) finalized the provisional credit ratings on the following Mortgage Pass-Through Certificates, Series 2024-1 (the Certificates) issued by Grove Funding III Trust 2024-1 (the Trust or the Issuer):

-- $300.6 million Class A-1 at AAA (sf)
-- $34.7 million Class A-2 at AA (sf)
-- $41.3 million Class A-3 at A (sf)
-- $21.0 million Class M-1 at BBB (sf)
-- $17.7 million Class B-1 at BB (sf)
-- $12.1 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 Certificates reflects 31.95% of credit enhancement provided by subordinate Certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) credit ratings reflect 24.10%, 14.75%, 10.00%, 6.00%, and 3.25% of credit enhancement, respectively.

This transaction is a securitization of a portfolio of fixed- and adjustable-rate prime, expanded prime, and nonprime first-lien residential mortgages to be funded by the issuance of the Certificates. The Certificates are backed by 784 mortgage loans with a total principal balance of $441,683,784 as of the Cut-Off Date (February 1, 2024).

The originators for the mortgage pool are Logan Finance Corp. (Logan; 77.8%), RF Renovo Management Company, LLC (Renovo Originator; 12.2%), and other originators, each comprising less than 5.0% of the mortgage loans. The Renovo Originator and Logan mortgages were originated under the following programs: DSCR, Bank Statement, Full Doc.

Specialized Loan Servicing LLC (80.6%), RF Mortgage Services Corporation (12.2%), and Fay Servicing, LLC (7.2%) will service the loans within the pool as of the Closing Date.

Computershare Trust Company, N.A (rated BBB with a Stable trend by Morningstar DBRS) will act as Master Servicer. U.S. Bank National Association (rated AA (high) with a Negative trend by Morningstar DBRS), will act as Trustee, Securities Administrator, Certificate Registrar, and Custodian.

As of the Cut-Off Date, 97.0% of the loans are current, while 13 loans (3.0% of the pool) are 30 to 59 days delinquent, according to the Mortgage Bankers Association delinquency calculation method.

In accordance with the Consumer Financial Protection Bureau (CFPB) Qualified Mortgage (QM) rules, 49.2% of the loans by balance are designated as non-QM. Approximately 50.8% of the loans in the pool made to investors for business purposes are exempt from the CFPB Ability-to-Repay (ATR) and QM rules.

The Servicers will be required to advance delinquent principal and interest (P&I) on 30-day delinquent mortgage loans, contingent upon recoverability determination. Each Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties. If the applicable Servicer fails to make a required P&I advance, the Master Servicer will fund such P&I advance until it is deemed unrecoverable.

The Sponsor, directly or indirectly through a majority-owned affiliate, will retain an eligible vertical interest in at least 5.0% of the Certificates (except Class R Certificates) issued by the Issuer to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

On or after the earlier of (1) the Distribution date occurring in February 2027 or (2) the date when the aggregate stated principal balance of the mortgage loans is reduced to 30.0% of the Cut-Off Date balance, the Depositor has the option to purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such purchase, the Depositor then has the option to 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.

The Sponsor will have the option, but not the obligation, to repurchase any mortgage loan (other than loans under forbearance plan as of the Closing Date) that becomes 90 or more days delinquent or are real estate owned (REO) 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 Servicing Administrator and each of the Servicer, at its option, on or after the date on which the balance of the mortgage loans falls below 10% of the loans balance as of the Cut-Off Date, may purchase all of the mortgage loans and REO properties at the optional termination price described in the transaction documents.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior classes (Classes A-1, A-2, and A-3) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). After a Trigger Event, principal proceeds can be used to cover interest shortfalls on the Class A-1 and Class A-2 certificates before being applied sequentially to amortize the balances of the certificates (IIPP). For all other classes, principal proceeds can be used to cover interest shortfalls after the more senior tranches are paid in full (IPIP).

Excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover Amounts due to Class A-1 down to M-1 (and B-1, if issued with fixed rate coupon). On or after March 2028, interest and principal otherwise available to pay the Class B-3 interest and interest shortfalls may be used to pay the Class A Cap Carryover amounts. In addition, the Class A-1, A-2, and A-3 coupons step up by 1.00% after the payment date in March 2028 (step-up date).

The credit ratings reflect transactional strengths that include the following:

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

The transaction also includes the following challenges:

-- Investor DSCR Loans;
-- Certain Non-Prime, Non-QM, and Investor Loans;
-- Representations and Warranties framework;
-- One-Month Servicer Advances of Delinquent P&I; and,
-- Servicers' Financial Capability.

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

Morningstar DBRS’ credit ratings on the Certificates 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 Certificates are the related Interest Distribution Amount, any Interest Carryforward Amount, and the Class Balance.

Morningstar DBRS’ credit ratings on the Class A-1, Class A-2, and Class A-3 Certificates 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 Certificates if the Class A-1, Class A-2, and Class A-3 Certificates 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.