Morningstar DBRS Finalizes Provisional Credit Ratings and Assigns New Credit Ratings to Towd Point Mortgage Trust 2024-CES3

DBRS, Inc. (Morningstar DBRS) finalized the following provisional credit ratings to the Asset-Backed Notes, Series 2024-CES3 (the Notes) issued by Towd Point Mortgage Trust 2024-CES3 (TPMT 2024-CES3 or the Trust) as follows:

-- $365.8 million Class A1 at AAA (sf)
-- $35.4 million Class A2 at AA (high) (sf)
-- $24.6 million Class M1 at A (high) (sf)
-- $22.1 million Class M2 at BBB (high) (sf)
-- $16.7 million Class B1 at BB (high) (sf)
-- $9.3 million Class B2 at B (high) (sf)
-- $16.7 million Class B1A at BB (high) (sf)
-- $16.7 million Class B1AX at BB (high) (sf)
-- $16.7 million Class B1B at BB (high) (sf)
-- $16.7 million Class B1BX at BB (high) (sf)

Morningstar DBRS assigned the following credit ratings to the below exchangeable notes:

-- $22.1 million Class M2A at BBB (high) (sf)
-- $22.1 million Class M2AX at BBB (high) (sf)
-- $22.1 million Class M2B at BBB (high) (sf)
-- $22.1 million Class M2BX at BBB (high) (sf)
-- $22.1 million Class M2C at BBB (high) (sf)
-- $22.1 million Class M2CX at BBB (high) (sf)
-- $22.1 million Class M2D at BBB (high) (sf)
-- $22.1 million Class M2DX at BBB (high) (sf)

The issuer elected to add additional exchangeable notes after Morningstar DBRS assigned provisional ratings to certain notes. Class M2A, M2AX, M2B, M2BX, M2C, M2CX, M2D, and M2DX are exchangeable notes. These classes can be exchanged for proportionate shares of the Class M2 exchange notes as specified in the offering documents.

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

The AAA (sf) credit rating on the Class A1 Notes reflects 25.50% of credit enhancement provided by subordinate Notes. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BB (high) (sf), and B (high) (sf) credit ratings reflect 18.30%, 13.30%, 8.80%, 5.40%, and 3.50% of credit enhancement, respectively.

This transaction is securitization of a portfolio of fixed, prime and near-prime, closed-end second-lien (CES) residential mortgages funded by the issuance of the Asset-Backed Notes, Series 2024-CES3 (the Notes). The Notes are backed by 6,409 mortgage loans with a total principal balance of $491,034,312 as of the Cut-Off Date (April 30, 2024).

The portfolio, on average, is four months seasoned, though seasoning ranges from one to eight months. Borrowers in the pool represent prime and near-prime credit quality, weighted-average (WA) Morningstar DBRS-calculated FICO score of 729, Issuer-provided original combined loan-to-value ratio (CLTV) of 70.3%, and 100% originated with Issuer-defined full documentation. All the loans are current and none has been delinquent since origination.

TPMT 2024-CES3 represents the fifth CES securitization by FirstKey Mortgage, LLC and second by CRM 1 Sponsor, LLC. Spring EQ, LLC (49.7%), Rocket Mortgage, LLC (Rocket; 21.7%), and PennyMac Loan Services, LLC (PennyMac; 15.5%) are the top originators for the mortgage pool. The remaining originator comprises less than 15% of the mortgage loans.

Newrez, LLC d/b/a Shellpoint Mortgage Servicing (49.7%), Rocket (21.7%), PennyMac (15.5%), and Nationstar Mortgage LLC d/b/a Mr. Cooper (13.1%) are the Servicers of the loans in this transaction.

U.S. Bank Trust Company, National Association (rated AA (high) with a Negative trend by Morningstar DBRS) will act as the Indenture Trustee, Administrative Trustee, and Administrator. U.S. Bank National Association and Computershare Trust Company, N.A. (rated BBB with a Stable trend by Morningstar DBRS) will act as the Custodians.

CRM 1 Sponsor, LLC (CRM) will acquire the loans from various transferring trusts on the Closing Date. The transferring trusts acquired the mortgage loans from the Originators. CRM and the transferring trusts are beneficially owned by funds managed by affiliates of Cerberus Capital Management, L.P. Upon acquiring the loans from the transferring trusts, CRM will transfer the loans to CRM 1 Depositor, LLC (the Depositor). The Depositor in turn will transfer the loans to Towd Point Mortgage Grantor Trust 2024-CES3 (the Grantor Trust). The Grantor Trust will issue two classes of certificates: P&I Grantor Trust Certificate and IO Grantor Trust Certificate. The Grantor Trust certificates will be issued in the name of the Issuer. The Issuer will pledge P&I Grantor Trust Certificate with the Indenture Trustee and will be the primary asset of the Trust. As the Sponsor, CRM, through one or more majority-owned affiliates, will acquire and retain a 5% eligible vertical interest in each class of securities to be issued (other than any residual certificates) to satisfy the credit risk retention requirements.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau's Ability-to-Repay (ATR) rules, they were made to borrowers who generally do not qualify for agency, government, or private-label nonagency prime jumbo products for various reasons. In accordance with the Qualified Mortgage (QM)/ATR rules, 35.1% of the loans are designated as non-QM, 25.2% are designated as QM Rebuttable Presumption, and 37.7% are designated as QM Safe Harbor. Approximately 2.0% of the mortgages are loans made to investors for business purposes and were not subject to the QM/ATR rules.

There will not be any advancing of delinquent principal or interest on any mortgages by the Servicers or any other party to the transaction. In addition, the related servicer is not obligated to make advances in respect of homeowner association fees, taxes, and insurance, installment payments on energy improvement liens, and reasonable costs and expenses incurred in the course of servicing and disposing of properties unless a determination is made that there will be material recoveries.

For this transaction, any loan that is 150 days delinquent under the Office of Thrift Supervision (OTS) delinquency method (equivalent to 180 days delinquent under the Mortgage Bankers Association delinquency method), upon review by the related Servicer, may be considered a Charged Off Loan. With respect to a Charged Off Loan, the total unpaid principal balance will be considered a realized loss and will be allocated reverse sequentially to the Noteholders. If there are any subsequent recoveries for such Charged Off Loans, the recoveries will be included in the principal remittance amount and applied in accordance with the principal distribution waterfall; in addition, any class principal balances of Notes that have been previously reduced by allocation of such realized losses may be increased by such recoveries sequentially in order of seniority. Morningstar DBRS' analysis assumes reduced recoveries upon default on loans in this pool.

This transaction incorporates a sequential-pay cash flow structure. Principal proceeds and excess interest can be used to cover interest shortfalls on the Notes, but such shortfalls on Class A2 and more subordinate bonds will not be paid from principal proceeds until the Class A1 Notes are retired.

On or after (1) the payment date in May 2027 or (2) the first payment date when the aggregate pool balance of the mortgage loans (other than the Charged Off Loans and the REO properties) is reduced to less than 30.0% of the Cut-Off Date balance, the call option holder will have the option to purchase P&I Grantor Trust Certificate so long as the aggregate proceeds from such purchase exceeds the minimum price (Optional Redemption). Minimum price will at least equal sum of (A) class balances of the Notes plus the accrued interest and unpaid interest, (B) any fees, expenses, and indemnification amounts, and (C) accrued and unpaid amounts owed to the Class X Certificates minus the Class AX distributable amount.

On or after the first payment date on which the aggregate pool balance of the mortgage loans and the REO properties is less than 10% of the aggregate pool balance as of the Cut-Off Date, the call option holder will have the option to purchase P&I Grantor Trust Certificate at the minimum price (Clean-Up Call).

The transaction assumptions consider Morningstar DBRS' baseline macroeconomic scenarios for rated sovereign economies, available in its commentary "Baseline Macroeconomic Scenarios for Rated Sovereigns March 2024 Update," published on March 27, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS' moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020.

The credit ratings reflect transactional strengths that include the following:

-- Robust equity and prime/near-prime credit quality;
-- Certain second-lien attributes;
-- Satisfactory third-party due-diligence review;
-- Current loan status; and
-- Improved underwriting standards.

The transaction also includes the following challenges:

-- Representations and warranties framework;
-- No servicer advances of delinquent principal and interest; and
-- Limited third-party diligence valuation review.

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 each of the rated Notes are the related Current Interest, Interest Shortfall, and the related Class Principal Balance.

Morningstar DBRS' credit ratings on the Class A1, Class A2, Class M1, and Class M2 Notes also address the credit risk associated with the increased rate of interest applicable if the Class A1, Class A2, Class M1, and Class M2 Notes remain outstanding on or after the payment date in June 2028 in accordance with the applicable transaction document(s).

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 Net WAC Shortfall.

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.

Morningstar DBRS materially deviated from its principal methodology when determining the credit ratings assigned to all rated classes by deriving probability of default for this pool by using the first-lien module (at the CLTV level) of its RMBS Insight model. The material deviation is warranted given that the CES module of Morningstar DBRS' proprietary RMBS Insight model is developed using pre-crisis CES mortgage and performance data, which does not give credit to certain collateral attributes and improved underwriting, and therefore may not be applicable for post-crisis CES loans.

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.

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.