Morningstar DBRS Assigns Provisional Credit Ratings to A&D Mortgage Trust 2024-NQM3

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following Mortgage Pass-Through Certificates, Series 2024-NQM3 (the Certificates) to be issued by A&D Mortgage Trust 2024-NQM3 (the Trust) as follows:

-- $279.3 million Class A-1 at AAA (sf)
-- $21.3 million Class A-2 at AA (low) (sf)
-- $33.6 million Class A-3 at A (low) (sf)
-- $21.1 million Class M-1 at BBB (low) (sf)
-- $29.0 million Class B-1 at BB (low) (sf)
-- $11.7 million Class B-2 at B (low) (sf)

The AAA (sf) credit rating on the Class A-1 Certificates reflects 30.65% of credit enhancement provided by subordinated Certificates. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) credit ratings reflect 25.35%, 17.00%, 11.75%, 4.55%, and 1.65% 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 a portfolio of predominantly fixed prime and nonprime first and second lien residential mortgages funded by the issuance of the Mortgage Pass-Through Certificates, Series 2024-NQM3 (the Certificates). The Certificates are backed by 1,122 loans with a total principal balance of approximately $402,793,330 as of the Cut-Off Date (June 1, 2024).

The originators for the mortgage pool are A&D Mortgage LLC (ADM; 90.3%) and others (9.7%). ADM originated the mortgages predominantly under the following programs:
-- Super Prime
-- Prime
-- Debt Service Coverage Ratio (DSCR)
-- Foreign National - Full Doc
-- Foreign National - DSCR
-- Second Lien

A&D Mortgage LLC (ADM) will act as the Sponsor and the Servicer for all loans.

Nationstar Mortgage LLC (Nationstar) will act as the Master Servicer and Citibank, N.A. (rated AA (low) with a Stable trend by Morningstar DBRS) will act as the Securities Administrator and Certificate Registrar. Wilmington Trust, National Association will serve as the Custodian, and Wilmington Savings Fund Society, FSB will act as the Trustee.

The pool is about two months seasoned on a weighted-average (WA) basis, although seasoning may span from zero to 15 months.

In accordance with U.S. credit risk retention requirements, ADM as the Sponsor, either directly or through a Majority-Owned Affiliate, will retain an eligible horizontal residual interest consisting of the Class X Certificates and the Class B-3 Certificates (together, the Risk Retained Certificates), representing not less than 5% economic interest in the transaction, to satisfy the requirements under Section 15G of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.

Although the applicable mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ability-to-repay (ATR) rules, they were made to borrowers who generally do not qualify for the agency, government, or private-label nonagency prime products for various reasons described above. In accordance with the CFPB Qualified Mortgage (QM)/ATR rules, 38.3% of the loans are designated as non-QM. Approximately 44.8% of the loans are made to investors for business purposes and are thus not subject to the QM/ATR rules. Also, 108 loans (12.1% of the pool) are a qualified mortgage with a conclusive presumption of compliance with the ATR rules and is designated as QM Safe Harbor.

The Servicer will generally fund advances of delinquent principal and interest (P&I) on any mortgage until such loan becomes 90 days delinquent under the Mortgage Bankers Association (MBA) method, contingent upon recoverability determination. The Servicer is also obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties. If the Servicer fails in its obligation to make P&I advances, Nationstar, as the Master Servicer, will be obligated to fund such advances. In addition, if the Master Servicer fails in its obligation to make P&I advances, Citibank, N.A., as the Securities Administrator, will be obligated to fund such advances. The Master Servicer and Securities Administrator are only responsible for P&I Advances; the Servicer is responsible for P&I and advances with respect to taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (Servicing Advances). If the Servicer fails to make the Servicing Advances on a delinquent loan, the recovery amount upon liquidation may be reduced.

The Sponsor (ADM) will have the option, but not the obligation, to repurchase any mortgage loan that is 90 or more days delinquent under the MBA method forbearance loan, such mortgage loan becomes 90 or more days delinquent under the MBA method after the related forbearance period ends or any REO property acquired in respect of a mortgage loan) at the Repurchase Price, provided that such repurchases in aggregate do not exceed 7.5% of the total principal balance as of the Cut-Off Date.

The Depositor (A&D Mortgage Depositor LLC) may, at its option, on any date which is the later of (1) the two year anniversary of the Closing Date, and (2) the earlier of (A) the three year anniversary of the Closing Date and (B) the date on which the total loan balance is less than or equal to 30% of the loan balance as of the Cut-Off Date, purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts (Optional Redemption). An Optional Redemption will be followed by a qualified liquidation, which requires a complete liquidation of assets within the Trust and the distribution of proceeds to the appropriate holders of regular or residual interests.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the Class A-1, Class A-2, and Class A-3 Notes (Senior Classes) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). However, in contrast to the prior Morningstar DBRS rated transaction from this shelf, in the case of a Credit Event, principal proceeds will be allocated to cover interest shortfalls on the Class A-1 and then in reduction of the Class A-1 certificate balance, before a similar allocation of funds to the Class A-2 (IPIP). Prior issuance would typically allocate principal (after a Credit Event) to cover interest shortfalls on the Class A-1 and Class A-2 Notes (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated notes. In the current transaction, and the prior transaction, for the Class A-3 Notes (only after a Credit Event) and for the mezzanine and subordinate classes of notes (both before and after a Credit Event), principal proceeds will be available to cover interest shortfalls only after the more senior notes have been paid off in full. Also, the excess spread can be used to cover realized losses first before being allocated to unpaid Cap Carryover Amounts due to the Class A-1, Class A-2, Class A-3, and Class M-1 Certificates.

Of note, the Class A-1, Class A-2, and Class A-3 Certificates' coupon rates step up by 100 basis points on and after the payment date in July 2028 (Step-Up Certificates). Also, the interest and principal otherwise payable to the Class B-3 Certificates as accrued and unpaid interest may be used to pay the Class A-1, Class A-2, and Class A-3 Certificates' Cap Carryover Amounts after the Class A coupons step up.

The credit ratings reflect transactional strengths that include the following:
-- Substantial borrower equity, robust loan attributes, and pool composition;
-- Compliance with the ATR rules;
-- Satisfactory third-party due-diligence review;
-- Current loans; and
-- Improved underwriting standards.

The transaction also includes the following challenges:
-- Nonprime, non-QM, and investor loans;
-- Three-month advances of delinquent P&I;
-- Representations and warranties framework;
-- Servicer's financial capability; and
-- A servicer with limited performance history.

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

Morningstar DBRS' credit ratings on the Certificates 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 Certificates are the related Interest Distribution Amount, Interest Carryforward Amount, and the related Class Balances.

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 Amounts based on its position in the cash flow waterfall. Morningstar DBRS' credit ratings on the Class A-1, Class A-2 and Class A-3 Certificates also addresses the credit risk associated with the increased rate of interest applicable to the Class A-1, Class A-2, and Class A-3 Certificates if the Class A-1, Class A-2, and Class A-3 Certificates remain outstanding on and after the step-up date (July 2028) 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. 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.
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/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

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