Morningstar DBRS Assigns Provisional Credit Ratings to Saluda Grade Alternative Mortgage Trust 2024-FIG5

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following Asset-Backed Securities, Series 2024-FIG5 (the Notes) to be issued by Saluda Grade Alternative Mortgage Trust 2024-FIG5 (GRADE 2024-FIG5 or the Issuer):

-- $189.2 million Class A Notes at AAA (sf)
-- $11.2 million Class B Notes at AA (low) (sf)
-- $10.0 million Class C Notes at A (low) (sf)
-- $10.5 million Class D Notes at BBB (low) (sf)
-- $14.7 million Class E Notes at BB (low) (sf)

The AAA (sf) credit rating on the Class A Notes reflects 23.65% of credit enhancement provided by subordinate notes. The AA (low) (sf), A (low) (sf), BBB (low) (sf), and BB (low) (sf) credit ratings reflect 19.15%, 15.10%, 10.85%, and 4.90% of credit enhancement, respectively.

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

This transaction is a securitization of recently originated first- and junior-lien revolving home equity lines of credit (HELOCs) funded by the issuance of the Notes. The Notes are backed by 3,961 loans (individual HELOC draws), which correspond to 3,483 HELOC families (each consisting of an initial HELOC draw and subsequent draws by the same borrower) with a total unpaid principal balance (UPB) of $247,818,553 and a total current credit limit of $278,890,595 as of the Cut-Off Date (March 31, 2024).

The portfolio, on average, is four months seasoned, though seasoning ranges from one to 39 months. All the HELOCs are current and 99.8% have never been 30 or more (30+) days delinquent since origination. All the loans in the pool are exempt from the Consumer Financial Protection Bureau Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because HELOCs are not subject to the ATR/QM rules.

GRADE 2024-FIG5 represents the fifth Figure Lending LLC (Figure) HELOC securitization by the Sponsor, Saluda Grade Opportunities Fund LLC (Saluda Grade). Figure is the Loan Seller of the transaction, the Originator of most of the HELOCs in the pool (46.5%), and the Servicer of all the loans. Figure-originated HELOCs are included in two unrated securitizations (GRADE 2020-FIG1 and GRADE 2021-FIG2) and two rated securitizations (GRADE 2023-FIG3 and GRADE 2023-FIG4) sponsored by Saluda Grade, and five securitizations (FLOC 2020-1, FIGRE 2023-HE1, FIGRE 2023-HE2, FIGRE 2023-HE3, and FIGRE 2024-HE1) sponsored by Figure. These transactions’ performance to date is satisfactory.

Figure is a wholly owned, indirect subsidiary of Figure Technologies, Inc. (Figure Technologies) that was formed in 2018. A financial services and technology company, Figure Technologies leverages technology, including blockchain, for the origination and servicing of loans, loan payments, and loan sales. In addition to the home equity line of credit (HELOC) product, Figure has offered several different lending products within the consumer lending space including student loan refinance, unsecured consumer loans, and conforming first lien mortgage.

HELOC FEATURES
In this transaction, all loans are open-HELOCs that have a draw period of two, three, four, or five years during which borrowers may make draws up to a credit limit, though such right to make draws may be temporarily frozen, suspended, or terminated under certain circumstances. After the draw term, HELOC borrowers have a repayment period ranging from three to 25 years and are no longer allowed to draw. During the draw period and the repayment period, the outstanding principal balance is fully amortized over the remaining term of the HELOC. All HELOCs in this transaction are fixed-rate loans with no interest-only payment periods, and no loans require a balloon payment.

The loans are made mainly to borrowers with prime and near-prime credit quality who seek to take equity cash out for various purposes. These HELOCs are fully drawn at origination, as evidenced by the weighted-average utilization rate of approximately 96.4% after four months of seasoning on average. For each borrower, the HELOC, including the initial and any subsequent draws, is defined as a loan family within which every new credit line draw becomes a de facto new loan with a new fixed interest rate determined at the time of the draw by adding the margin determined at origination to the then current prime rate, floored at the original rate.

Relative to traditional HELOCs, the loans in the pool are all fixed-rate, fully amortizing with a shorter draw period, and may have terms significantly shorter than 30 years, including five- to 10-year terms.

CERTAIN UNIQUE FACTORS IN HELOC ORIGINATION PROCESS
Figure seeks to originate HELOCs for borrowers of prime and near-prime credit quality with ample home equity. It leverages technology in underwriting, title searching, regulatory compliance, and other lending processes to shorten the approval and funding process and improve the borrower experience. Below are certain aspects in the lending process that are unique to Figure’s origination platform:
-- To qualify a borrower for income, Figure seeks to confirm the borrower’s stated income using proprietary technology algorithms.
-- The lender uses the FICO 9 credit score model instead of the classic FICO credit score model used by most mortgage originators.
-- Instead of title insurance, Figure uses an electronic lien search algorithm to identify existing property liens.
-- Figure uses a property valuation provided by an automatic valuation model (AVM) instead of a full property appraisal.

The credit impact of these factors is generally loan specific. Although technologically advanced, the income, employment, and asset verification methods used by Figure were treated as less than full documentation in the RMBS Insight model. In addition, Morningstar DBRS applied haircuts to the provided AVM valuations, reduced the projected recoveries on junior-lien HELOCs, and generally stepped up expected losses from the model to account for a combined effect of these and other factors. Please see the Documentation Type and Underwriting Guidelines sections of the presale report for details.

TRANSACTION AND OTHER COUNTERPARTIES
In addition to the Figure-originated HELOCs, the mortgages were originated by Homebridge Financial Services, Inc. and its affiliates (17.9%), The Loan Store, Inc. (11.1%), as well as other originators (together, the White Label Partner Originators), each comprising less than 10.0% of the pool by balance. The White Label Partner Originators originated HELOCs using Figure's online origination applications under Figure’s underwriting guidelines.

Figure will service all loans within the pool for a servicing fee of 0.25% per year. Figure services HELOC loans until they become 60 days delinquent or other circumstances arise that require special handling including bankruptcy, initiation of foreclosure on the senior lien, or litigation, at which time they are transferred to the special servicer, Specialized Loan Servicing LLC.

Wilmington Savings Fund Society, FSB (WSFS Bank) will serve as the Indenture Trustee, Paying Agent, Note Registrar, and Certificate Registrar. WSFS Bank will also serve as the Custodian and the Delaware Trustee.

DRAW FUNDING MECHANISM
This transaction uses a structural mechanism similar to other HELOC transactions to fund future draw requests. The Servicer will be required to fund draws and will be entitled to reimburse itself for such draws from the principal collections prior to any payments on the Notes and the Class G Certificates.

If the aggregate draws exceed the principal collections (Net Draw), the Servicer is entitled to reimburse itself for draws funded from amounts on deposit in the Reserve Account (including amounts deposited into the Reserve Account on behalf of the Class G Certificateholder after the Closing Date).

The Reserve Account is funded at closing initially with a rounded balance of $991,274 (0.40% of the aggregate UPB as of the Cut-Off Date). Prior to the payment date in May 2029, the Reserve Account Required Amount will be 0.40% of the aggregate UPB as of the Cut-Off Date. On and after the payment date in May 2029 (after the draw period ends for all HELOCs), the Reserve Account Required Amount will become $0, at which point the funds will be released through the transaction waterfall. Monthly Excess Cashflows will be used to fund the Reserve Account if it is not at the Reserve Account Required Amount. If Monthly Excess Cashflows are insufficient, the Class G Certificateholder will be required to use its own funds to reimburse the Servicer for any Net Draws.

Nevertheless, the Servicer is still obligated to fund draws even if collections and the Reserve Account are insufficient in a given month for full reimbursement. In such cases, the Servicer will be reimbursed on subsequent payment dates first, from amounts on deposit in the Reserve Account, and second, from the collections in subsequent collection periods. Saluda Grade, as a holder of the Class G Certificates, will have an ultimate responsibility to ensure draws are funded by remitting funds to the Reserve Account to reimburse the Servicer for the draws made on the loans, as long as all borrower conditions are met to warrant draw funding. The Class G Certificates' balance will be increased by the amount of any Net Draws funded by the Class G Certificateholder.

In its analysis of the proposed transaction structure, Morningstar DBRS does not rely on the creditworthiness of either the Servicer or Saluda Grade. Rather, the analysis relies on the assets’ ability to generate sufficient cash flows, as well as the Reserve Account, to fund draws and make interest and principal payments.

ADDITIONAL CASH FLOW ANALYTICS FOR HELOCS
Morningstar DBRS performs a traditional cash flow analysis to stress prepayments, loss timing, and interest rates. Generally, in HELOC transactions, because prepayments (and scheduled principal payments, if applicable) are primary sources from which to fund draws, Morningstar DBRS also tests a combination of high draw and low prepayment scenarios to stress the transaction.

Similar to other transactions backed by junior-lien mortgage loans or HELOCs, in this transaction, any HELOCs, including first and junior liens, that are 180 days delinquent under the Mortgage Bankers Association delinquency method will be charged off.

TRANSACTION STRUCTURE
The transaction employs a pro rata cash flow structure subject to a Credit Event, which is based on certain performance trigger events related to cumulative losses, delinquencies, and excess spread. If a Credit Event is in effect, principal distributions are made sequentially.

The Excess Spread Trigger Event is occurring on any payment date on or after the payment date in February 2025 (after the first nine payment dates), when the three-month average excess spread, as described in the Cash Flow Structure and Features section of the presale report, does not exceed 4.50%. The Cumulative Loss and Delinquency Trigger Events are applicable immediately after the Closing Date.

Relative to a sequential pay structure, a pro rata structure subject to a sequential trigger (Credit Event) is more sensitive to the timing of the projected defaults and losses as the losses may be applied at a time when the amount of credit support is reduced as the bonds' principal balances amortize over the life of the transaction.

The class principal balance of the Class CE Notes will equal the overcollateralization (OC) amount; represented on any payment date by the excess, if any, of (1) the aggregate UPB of the loans over (2) the aggregate class principal balances of Class A, B, C, D, and E Notes and Class G Certificates outstanding. The class principal balance of the Class CE Notes is subject to an OC floor of 1.00% of the Cut-Off Date UPB of the loans and will not exceed the original class principal balance of the Class CE Notes (about 4.90% of the Cut-Off Date UPB of the loans). Principal can be paid to Class CE in reduction of its class principal balance so long as the Minimum OC Trigger Event is not occurring. Please see Cash Flow Structure and Features section of the presale report for more details.

OTHER TRANSACTION FEATURES
The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest consisting of 5% of each class of Notes to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. The required credit risk must be held until the later of (1) the fifth anniversary of the Closing Date and (2) the date on which the aggregate loan balance has been reduced to 25% of the loan balance as of the Cut-Off Date.

For this transaction, other than the Servicer’s obligation to fund any monthly Net Draws, described above, neither the Servicer nor any other transaction party will fund any monthly advances of principal and interest on any HELOC. However, the Servicer is required to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances) to the extent such advances are deemed recoverable.

On any date when the Fixed Rate Notes (Class A, B, C, D, and E Notes) balance falls to or below 20% of the Cut-Off Date UPB, the Issuer, at the direction of the Controlling Holder, may exercise a call and purchase all of the outstanding Notes at the redemption price (Optional Redemption) described in the transaction documents.

The credit ratings reflect transactional strengths that include the following:

-- Certain HELOC attributes,
-- Robust equity and prime and near-prime credit quality,
-- Current loan status
-- Improved structural features, and
-- Satisfactory third-party due-diligence sample size and compliance review.

The transaction also includes the following challenges:

-- Holder of the Class G Certificates may fail to reimburse the servicer for draws,
-- Representations and warranties standard,
-- No servicer advances of delinquent principal and interest, and
-- Certain limitations of third-party due-diligence credit and valuation reviews.

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 the rated notes are the Interest Payment Amount, Interest Carryforward Amount, and the 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.

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.

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.
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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.