Morningstar DBRS Assigns Provisional Credit Ratings to Mello Mortgage Capital Acceptance 2024-SD1

DBRS, Inc. (Morningstar DBRS) assigned the following provisional credit ratings to the Mortgage-Backed Notes, Series 2024-SD1 (the Notes) to be issued by Mello Mortgage Capital Acceptance 2024-SD1 (Mello 2024-SD1 or the Trust) as follows:

-- $79.4 million Class A-1 at AAA (sf)
-- $10.1 million Class A-2 at AA (high) (sf)
-- $10.4 million Class A-3 at A (sf)
-- $8.8 million Class M-1 at BBB (sf)
-- $6.3 million Class M-2 at BB (high) (sf)

The AAA (sf) rating on the Class A-1 Notes reflects 47.05% of credit enhancement provided by subordinated notes. The AA (high) (sf), A (sf), BBB (sf), and BB (high) (sf) ratings reflect 40.35%, 33.45%, 27.60%, and 23.40% of credit enhancement, respectively.

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

The transaction is a securitization of a portfolio of newly originated and seasoned, first-lien residential mortgages, to be funded by the issuance of mortgage-backed notes (the Notes). The Notes are backed by 436 loans with a total principal balance of approximately $150,047,122 as of the Cut-Off Date (March 31, 2024).

loanDepot.com, LLC, is the Originator, Seller, Servicer and Asset Manager for the transaction. This transaction represents the first scratch & dent RMBS securitization issued from the MELLO shelf by the Sponsor, mello Credit Strategies LLC. Since 2018, 11 prime and investor agency were previously issued from the MELLO shelf.

Morningstar DBRS calculated the portfolio to be approximately 26 months seasoned on average, though the ages of the loans are quite dispersed, ranging from three months to 108 months. All of the loans had origination guideline or document deficiencies, which prevented these loans from being sold to Fannie Mae, Freddie Mac, or another purchaser, and the loans were subsequently put back to the sellers for repurchase by loanDepot. In its analysis, Morningstar DBRS assessed such defects and applied certain penalties, consequently increasing expected losses on the mortgage pool.

In the portfolio, 7.6% of the loans are modified. The modifications happened less than two years ago for 64.4% of the modified loans. Within the portfolio, 11 mortgages have non-interest-bearing deferred amounts, equating to 0.1% of the total unpaid principal balance (UPB). Unless specified otherwise, all statistics on the mortgage loans in this report are based on the current UPB, including the applicable non-interest-bearing deferred amounts.

Based on Issuer-provided information, certain loans in the pool (7.2%) are not subject to or exempt from the Consumer Financial Protection Bureau's (CFPB) Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because of seasoning or because they are business-purpose loans. The loans subject to the ATR rules are designated as QM Safe Harbor (83.6%), QM Rebuttable Presumption (6.6%), and Non-QM (2.6%) by UPB.

mello Credit Strategies LLC (the Sponsor) will select the mortgage loans prior to the up-coming Closing Date. Upon the selection of the mortgage loans, a transfer will be initiated by the Sponsor to the Depositor and subsequently from the Depositor to the Issuer. As the Sponsor, or one of its majority-owned affiliates will acquire and retain a portion of the Class B Notes and the trust certificate representing the initial overcollateralization amount to satisfy the credit risk retention requirements.

The Servicer will have the option, but not the obligation, to sell any mortgage loan that becomes 60 or more days delinquent under the Mortgage Bankers Association (MBA) method to maximize proceeds to the Issuer, provided that such sales to the Sponsor, Seller, Depositor, or any of their related subsidiaries in aggregate do not exceed 10% of the unpaid principal balance as of the Cut-Off Date and the Servicer has obtained at least two additional independent bids.

The Servicer will not advance any delinquent principal and interest (P&I) on the mortgages; however, the Servicers are obligated to make advances in respect of prior liens, insurance, real estate taxes, and assessments as well as reasonable costs and expenses incurred in the course of servicing and disposing of properties.

The Issuer has the option to redeem the Notes in full at a price equal to the sum of (1) the remaining aggregate Note Amount; (2) any accrued and unpaid interest due on the Notes through the redemption date (including any Cap Carryover); and (3) any fees and expenses of the transaction parties, including any unreimbursed servicing advances (Redemption Price). Such Optional Redemption may be exercised on or after the payment date in April 2028. Additionally, the Issuer, at the direction of the Trust Certificate holder, has an Optional Redemption right on the payment date on or after April 2026.

The Issuer, at the direction of the Asset Manager, has the option to sell the mortgage loans to unaffiliated third parties at any price if the aggregate proceeds of all related sale(s) are sufficient to pay the Redemption Price. Such Bulk Sale may occur on or after the payment date in April 2026.

Additionally, a failure to pay the Notes in full by the Payment Date in April 2029 will trigger a mandatory auction of the underlying mortgage loans. If the auction fails to elicit sufficient proceeds to make-whole the Rated Notes, another auction will follow every four months for the first year and subsequently auctions will be carried out every six months. If the Asset Manager fails to conduct the auction, holders of more than 50% of the Class M-2 Notes will have the right to appoint an auction agent to conduct the auction.

The transaction employs a sequential-pay cash flow structure with a bullet feature to Class A-2 and more subordinate notes on the Redemption Date. P&I collections are commingled and are first used to pay interest and any Cap Carryover amount to the Notes sequentially and then to pay Class A-1 until its balance is reduced to zero, which may provide for timely payment of interest on certain rated Notes. Class A-2 and below are not entitled to any payments of principal until the Redemption Date or upon the occurrence of a Credit Event, except for remaining available funds representing net sales proceeds of the mortgage loans. Prior to the Redemption Date or an Event of Default, any available funds remaining after Class A-1 is paid in full will be deposited into a Redemption Account. Beginning on the Payment Date in May 2028, the Class A-1 and the other offered Notes will be entitled to its initial Note Rate plus the step-up note rate of 1.00% per annum. If the Issuer does not redeem the rated Notes in full by the payment date in April 2031 or an Event of Default occurs and is continuing, a Credit Event will have occurred. After a Credit Event, the Notes will be entitled to receive a Step-Up Note Rate of 3.000% from the initial Note Rate. Upon the occurrence of a Credit Event, accrued interest on Class A-2 and the other offered Notes will be paid as principal to Class A-1 or the succeeding senior Notes until it has been paid in full. The redirected amounts will accrue on the balances of the respective Notes and will later be paid as principal payments.

The ratings reflect transactional strengths that include the following:

-- Structural Features
-- Current Delinquency Status
-- Third-Party Due-Diligence Review

The transaction also includes the following challenges:

-- Loans Originated Outside of Fannie Mae, Freddie Mac, or Investor Guidelines
-- Representations and Warranties (R&W) Standard
-- Assignments and Endorsements
-- No Servicer Advances of Delinquent P&I

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

Morningstar DBRS' credit rating on Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are Interest Payment Amount, Cap Carryover Amount, and Note Amount.

Morningstar DBRS' credit rating on the Notes also addresses the credit risk associated with the increased rate of interest applicable to the Notes if the Notes are not redeemed on the Expected Redemption Date (as defined in and) in accordance with the applicable transaction document(s).

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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant 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), 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 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 the final credit ratings on the above-mentioned securities are 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205

-- 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

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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