Morningstar DBRS Finalizes Provisional Credit Ratings on Unlock HEA Trust 2024-1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the Asset-Backed Notes, Series 2024-1 (the Notes) issued by Unlock HEA Trust 2024-1 as follows:

-- $192.7 million Class A at BBB (sf)
-- $15.0 million Class B at BBB (low) (sf)

The BBB (sf) credit rating reflects credit enhancement of 16.7% for Class A, and the BBB (low) (sf) credit rating reflects credit enhancement of 10.2% for Class B.

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

Home equity investments (HEIs) allow homeowners access to the equity in their homes without having to sell their homes or make monthly mortgage payments. HEIs provide homeowners with an alternative to borrowing and are available to homeowners of any age (unlike reverse mortgage loans, for example, for which there is often a minimum age requirement). A homeowner receives an upfront cash payment (an Advance or an Investment Amount) in exchange for giving an Investor (i.e., an Originator) a stake in their property. The homeowner retains sole right of occupancy of the property and pays all upkeep and expenses during the term of the HEI, but the Originator earns an investment return based on the future value of the property, typically subject to a returns cap.

Like reverse mortgage loans, the HEI underwriting approach is asset-based, meaning there is greater emphasis placed on the value of the underlying property and the amount of home equity than on the credit quality of the homeowner. The property value is the main focus for predicting investment return because it is the primary source of funds to satisfy the obligation. HEIs are nonrecourse; in a default situation a homeowner is not required to provide additional funds when the HEI settlement amount exceeds the remaining equity value in the property (after accounting for any other obligations such as senior liens, if applicable). Recovery of the Advance and any Originator return is driven by the structure of the agreement, the amount of appreciation/depreciation on the property, the amount of debt that may be senior to the HEA, and the cap on investor return.

As of the cut-off date, the collateral consists of approximately $231.32 million in current exercise value from 2,625 nonrecourse HEI agreements secured by first, second, or third liens on single-family detached, multifamily (two- to four-family), condominium, and townhouse properties. All of the contracts in the asset pool were originated between 2022 and 2024.

Of the pool, 10.00% of the contracts are first lien and have a weighted-average exchange rate of 2.05 times (x), 77.70% are second-lien contracts and have a weighted-average exchange rate of 2.06x, and the remaining 12.30% of the pool are third-lien contracts with a weighted-average exchange rate of 2.10x. This brings the entire transaction's weighted-average exchange rate to 2.06x. To better understand the impact and mechanics of exchange rates, please see the example in the Contract Mechanics—Worked Example section of the related presale report. The current unadjusted loan-to-value ratio of the pool is 40.27% (i.e., of senior liens ahead of the contracts). At cut-off, the pool had a weighted-average contract-to-value (also known as option-to-value) of 17.17%, and a weighted-average loan plus contract-to-value (also known as loan plus option-to-value) of 57.44%.

The transaction uses a sequential structure in which cash distributions are first made to reduce the interest payment amount and any interest carryforward amount on Class A-IO, Class A, and Class B (as long as a Class B trigger event is not in effect). Payments are then made to reduce the note principal balance on Class A Notes until such notes are paid off. With respect to Class B Notes, payments are first made to any remaining interest payment amount and interest carryforward amount and then to reduce the note principal balance until such notes are paid off. Class C Notes are then paid the Interest Payment Amount and any previously accrued and unpaid Interest Payment Amount and then to reduce the note principal balance until such notes are paid off.

A Class B trigger event will occur if (1) the payment date on which the Borrower Trust Reserve Fund is less than 50% of the Borrower Trust Reserve Fund Target Amount or (2) the payment date on which the average home price valuation of the outstanding HEA is less than 90% of the starting home valuation as of the cut-off date. During a Class B Trigger Event, the Class B Notes shall not receive any interest or principal payments until the Class A Notes are fully paid down.

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 Class Principal Balance, Interest Payment Amount, and Interest Carryforward Amount.

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.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is Rating and Monitoring U.S. Reverse Mortgage Securitizations (July 17, 2023), https://dbrs.morningstar.com/research/417277.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info-DBRS@morningstar.com.

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.

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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
-- 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

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