Morningstar DBRS Assigns Provisional Credit Ratings to Saluda Grade Alternative Mortgage Trust 2024-CES1

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following Asset-Backed Securities, Series 2024-CES1 (the Notes) to be issued by Saluda Grade Alternative Mortgage Trust 2024-CES1 (GRADE 2024-CES1 or the Trust):

-- $256.0 million Class A-1 at AAA (sf)
-- $14.7 million Class A-2 at AA (low) (sf)
-- $15.3 million Class A-3 at A (low) (sf)
-- $16.6 million Class M-1 at BBB (low) (sf)
-- $14.5 million Class B-1 at BB (low) (sf)
-- $9.2 million Class B-2 at B (low) (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 22.30% of credit enhancement provided by subordinate Notes. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) credit ratings reflect 17.85%, 13.20%, 8.15%, 3.75%, and 0.95% 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 Asset-Backed Securities, Series 2024-CES1 (the Notes). The Notes are backed by 3,592 mortgage loans with a total principal balance of $329,421,636 as of the Cut-Off Date (February 29, 2024).

The portfolio, on average, is five months seasoned, though seasoning ranges from zero to 23 months. Borrowers in the pool represent prime and near-prime credit quality—weighted-average (WA) Morningstar DBRS-calculated FICO score of 725, Issuer-provided original combined loan-to-value ratio (CLTV) of 73.7%, vast majority of loans originated with full documentation standards. All the loans are current and 98.1% of the loans (by pool balance) have never been delinquent since origination.

GRADE 2024-CES1 represents the first securitization by Saluda Grade Opportunities Fund LLC (Saluda Grade; the Sponsor) backed by 100.0% CES mortgage loans. The Sponsor has in the past securitized three deals with a mix of CES and home equity lines of credit mortgage loans. Spring EQ, LLC (Spring EQ; 83.9%) is the top originator for the mortgage pool. The remaining originators each comprise less than 15.0% of the mortgage loans.

Specialized Loan Servicing LLC (SLS; 100.0%), is the Servicer for all 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, Paying Agent, Note Registrar, and Certificate Registrar. Wilmington Trust, National Association (rated AA (low) with a Negative trend by Morningstar DBRS) will act as the Custodian.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s 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, 74.5% of the loans are designated as non-QM (includes 32.5% that were classified as Non-Verification Safe Harbor QM amendment loans), 11.4% are designated as QM Rebuttable Presumption, and 6.3% are designated as QM Safe Harbor. Approximately 7.7% of the mortgages are loans made to investors for business purposes and are not subject to the QM/ATR rules.

There will not be any advancing of delinquent principal or interest on any mortgages by the Servicer or any other party to the transaction. In addition, the 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.

The Sponsor, directly or indirectly through a more majority-owned affiliate, will acquire and retain a 5% eligible vertical interest in each class of Notes to be issued (other than any residual certificates) 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 date when the aggregate stated principal balance of the mortgage loans is reduced to 20% of the Cut-Off Date balance, the Sponsor (after written consent from the majority holder of Class XS Notes; the Controlling Holder) has the option to terminate the Issuer and purchase all the mortgage loans (including REO properties) at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts (Optional Redemption).

The Controlling Holder will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent 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 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 minimum price described in the transaction documents (Optional Clean-up Call).

For this transaction, any loan that is 180 days delinquent under the Mortgage Bankers Association delinquency method, upon review by the 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 (net of reimbursement amounts and performance incentive fees) will be included in the interest remittance amount and principal remittance amount and applied in accordance with the respective 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 employs a sequential-pay cash flow structure. Principal proceeds and excess interest can be used to cover interest shortfalls after the more senior tranches are paid in full (IPIP).

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 Interest Payment Amount, Interest Carryforward Amount, 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 Cap Carryover Amount 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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://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/428624
-- 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.