Morningstar DBRS Assigns Provisional Credit Ratings to Unison Trust 2024-1

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of notes to be issued by Unison Trust 2024-1 (UNSN 2024-1 or the Transaction):

-- $110.8 million Class A Notes at BBB (sf)
-- $12.9 million Class B Notes at BB (sf)

The BBB (sf) rating reflects credit enhancement of 48.7% for the Class A Notes, and the BB (sf) rating reflects credit enhancement of 42.7% for the Class B Notes.

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 the homeowners 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. Some HEI programs include a returns cap, but no caps exist in UNSN 2024-1.

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 Investment Amount and any Originator return is primarily subject to the amount of appreciation/depreciation on the property, the amount of debt that may be senior to the HEI, and the cap on investor return, if applicable.

As of the cut-off date, 61 contracts in the transaction are first-lien contracts, representing roughly $5.91 million in original investment payment; 773 are second-lien contracts, representing roughly $62.55 million in original investment payment; 123 are third-lien contracts, representing roughly $12.36 million in original investment payment; and eight are fourth-lien contracts, representing roughly $0.71 million in original investment payment.

Of the pool, 7.25% of the contracts by original investment amount are first lien and have a weighted-average original sensitivity ratio* of 3.97, 76.73% are second-lien contracts and have a weighted-average original sensitivity ratio of 3.95, 15.16% of the pool are third-lien contracts with a weighted-average original sensitivity ratio of 3.99, and the remaining 0.87% of the pool are fourth-lien contracts and have a weighted-average original sensitivity ratio of 4.00. This brings the entire transaction's weighted-average sensitivity ratio to 3.96. To better understand the impact and mechanics of sensitivity ratio, please see the example below, in the Contract Mechanics—Worked Example section. The current unadjusted loan-to-value ratio (LTV) of the pool is 39.96% (i.e., of senior liens ahead of the contracts). At cut-off, the pool had a weighted-average original option-to-value (OTV) of 15.23%, and a weighted-average original loan-plus-option-to-value (LOTV) of 71.23%.

The transaction uses a sequential structure in which cash distributions are first made to reduce the Interest Amount and Cap Carryover Amount on Class A Notes. Payments are then made to the Note Amount of Class A Notes until such notes are reduced to zero followed by payments to reduce the Additional Accrued Amounts for the Class A Notes that accrued on any earlier payment date but have not been paid until the Additional Accrued Amounts are reduced to zero. The Class B Notes are full accrual notes and will not be entitled to receive any payments of principal until the Class A Notes and Class A Additional Accrued Amounts have been paid in full. Payments will not be made to the Class B Notes unless and until an Optional Redemption, Clean-Up Call, Auction Proceeds Redemption, or Indenture Default. Upon an Optional Redemption, Clean-Up Call, Auction Proceeds Redemption, or Indenture Default, payments are made to the aggregate Note Amount on the outstanding notes.

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 Note Amounts. In addition, the associated financial obligations for the Class A Notes include the related Cap Carryover and Interest Amounts.

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, the credit ratings on the notes do not address Additional Accrued Amounts based on their position in the cash flow waterfall.

Morningstar DBRS’s 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, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 (23 January 2024); https://dbrs.morningstar.com/research/427030.

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

*Sensitivity ratios at origin calculated as Investor Percentage/(Investment Payment/Original Agreed Value). Sensitivity ratios as of any date of measurement are calculated as Investor Percentage/(Option Exercise Value/Updated Valuation as of such date).

The principal methodology applicable to the credit ratings is Rating and Monitoring U.S. Reverse Mortgage Securitizations - Appendix 3: Home Equity Investments Methodology (17 July 2023) https://dbrs.morningstar.com/research/417277/rating-and-monitoring-u.s.-reverse-mortgage-securitizations.

Other methodologies referenced in this transaction are listed at the end of this press release.

The Morningstar DBRS Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. Morningstar DBRS analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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.
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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.

-- 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205
-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023), https://www.dbrsmorningstar.com/research/420106
-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023), https://www.dbrsmorningstar.com/research/420107
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023), https://www.dbrsmorningstar.com/research/414076

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