Morningstar DBRS Finalizes Provisional Credit Ratings on FIGRE Trust 2024-HE3

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following Mortgage-Backed Notes, Series 2024-HE3 (the Notes) issued by FIGRE Trust 2024-HE3 (FIGRE 2024-HE3):

-- $275.4 million Class A at AAA (sf)
-- $24.5 million Class B at AA (low) (sf)
-- $24.9 million Class C at A (low) (sf)
-- $14.6 million Class D at BBB (low) (sf)
-- $14.0 million Class E at BB (low) (sf)
-- $12.9 million Class F at B (low) (sf)

The AAA (sf) rating on the Class A Notes reflects 27.45% of credit enhancement provided by subordinate notes. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) ratings reflect 21.00%, 14.45%, 10.60%, 6.90%, and 3.50% 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 5,617 loans (individual HELOC draws) which correspond to 5,142 HELOC families (each consisting of an initial HELOC draw and subsequent draws by the same borrower) with a total unpaid principal balance (UPB) of $379,535,977 and a total current credit limit of $410,341,203 as of the Cut-Off Date (June 30, 2024).

The portfolio, on average, is three months seasoned, though seasoning ranges from one to 22 months. All of the HELOCs are current and have been performing since origination. All of the loans in the pool are exempt from the Consumer Financial Protection Bureau (CFPB) Ability-to-Repay (ATR)/Qualified Mortgage (QM) rules because HELOCs are not subject to the ATR/QM rules.

Figure is a wholly owned, indirect subsidiary of Figure Technologies, Inc. (Figure Technologies) that was formed in 2018. Figure Technologies is a financial services and technology company that leverages blockchain technology 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. In June 2023, the company launched a wholesale channel for its HELOC product. Figure originates and services loans in 46 states and the District of Columbia. As of June 30,2024, Figure originated, funded, and serviced more than 140,000 HELOCs totaling approximately $10.4 billion.

Figure is the Originator of most and the Servicer of all HELOCs in the pool. Other originators in the pool are REMN Wholesale, The Loan Store, and certain other lenders (together, the White Label Partner Originators). The White Label Partner Originators originated HELOCs using Figure's online origination applications under Figure's underwriting guidelines. Also, Figure is the Seller of all the HELOCs. Morningstar DBRS performed a telephone operational risk review of Figure's origination and servicing platform and believes the Company is an acceptable HELOC originator and servicer with a backup servicer that is acceptable to Morningstar DBRS.

Figure is the transaction's Sponsor. FIGRE 2024-HE3 is the seventh rated securitization of HELOCs by the Sponsor. Also, Figure-originated HELOCs are included in five securitizations sponsored by Saluda Grade. These transactions' performances to date are satisfactory.

The transaction includes mostly junior liens (primarily second liens) and some first-lien HELOCs.

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. At the end of the draw term, the HELOC mortgagors have a repayment period ranging from three to 25 years. During the repayment period, borrowers are no longer allowed to draw, and their monthly principal payments will equal an amount that allows the outstanding loan balance to evenly amortize down. All HELOCs in this transaction are fixed-rate loans. The HELOCs have no interest-only payment period, so borrowers are required to make both interest and principal payments during the draw and repayment periods. 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 (WA) utilization rate by current line amount of approximately 92.5% after three 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.

Relative to other HELOCs in Morningstar DBRS-rated deals, 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 maturities.

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.
-- Instead of a full property appraisal Figure uses a property valuation provided by an automatic valuation model (AVM), or in some cases where an AVM is not available or is ineligible, a broker price opinion (BPO), or a residential evaluation.

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, DBRS Morningstar applied haircuts to the provided AVM and BPO 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 related report for details.

Transaction Counterparties
Figure will service all loans within the pool for a servicing fee of 0.25% per year. Also, Newrez LLC d/b/a Shellpoint Mortgage Servicing (Shellpoint) will act as a Subservicer for loans that default or are 60 or more days delinquent under the Mortgage Bankers Association (MBA) method. In addition, Northpointe Bank (Northpointe) will act as a Backup Servicer for all mortgage loans in this transaction for a fee of 0.01% per year. If Figure fails to remit the required payments, fails to observe or perform the Servicer's duties, or experiences other unremedied events of default described in detail in the transaction documents, servicing will be transferred to Northpointe from Figure, under a successor servicing agreement. Such servicing transfer will occur within 45 days of the termination of Figure. In the event of a servicing transfer, Shellpoint will retain servicing responsibilities on all loans that were being special serviced by Shellpoint at the time of the servicing transfer. Morningstar DBRS performed an operational risk review of Northpointe's servicing platform and believes the company is an acceptable loan servicer for Morningstar DBRS-rated transactions.

The Bank of New York Mellon will serve as Indenture Trustee, Paying Agent, Note Registrar, Certificate Registrar, and REMIC Administrator. Wilmington Savings Fund Society, FSB will serve as the Custodian and the Owner Trustee. DV01, Inc. will act as the loan data agent.

The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest consisting of the required percentage of the Class A, B, C, D, E, F, and CE Note amounts and Class FR Certificate to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. The Sponsor or a majority-owned affiliate of the Sponsor will be required to hold the required credit risk 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, but in any event no longer than the seventh anniversary of the Closing Date.

Similar to other transactions backed by junior lien mortgage loans or HELOCs, but different from certain Morningstar DBRS-rated FIGRE transactions, the HELOCs that are 180 days delinquent under the MBA delinquency method may not be charged off by the Servicer in its discretion. In its analysis, Morningstar DBRS assumes all junior lien HELOCs that are 180 days delinquent under the MBA delinquency method will be charged-off.

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 FR 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 FR Certificateholder after the Closing Date).

The Reserve Account is funded at closing initially with a rounded balance of $1,897,680 (0.50% of the aggregate UPB as of the Cut-Off Date). Prior to the payment date in August 2029, the Reserve Account Required Amount will be 0.50% of the aggregate UPB as of the Cut-Off Date. On and after the payment date in August 2029 (after the draw period ends for all HELOCs), the Reserve Account Required Amount will become $0. If the Reserve Account is not at target, the Paying Agent will use the available funds remaining after paying transaction parties' fees and expenses, reimbursing the Servicer for any unpaid fees or Net Draws, and paying the accrued and unpaid interest on the bonds to build it to the target. The top-up of the account occurs before making any principal payments to the Class FR Certificateholder or the Notes. To the extent the Reserve Account is not funded up to its required amount from the principal and interest (P&I) collections, the Class FR 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 the principal 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 (subject to the deposited funds), and second, from the principal collections in subsequent collection periods. Figure, as a holder of the Trust Certificate/Class FR 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 FR Certificates' balance will be increased by the amount of any Net Draws funded by the Class FR Certificateholder. The Reserve Account's required amount will become $0 on the payment date in August 2029 (after the draw period ends for all HELOCs), at which point the funds will be released through the transaction waterfall.

In its analysis of the proposed transaction structure, Morningstar DBRS does not rely on the creditworthiness of either the Servicer or Figure. 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.

Transaction Structure
The transaction employs a pro rata cash flow structure subject to a Credit Event, which is based on certain performance triggers related to cumulative losses and delinquencies. This transaction differs from certain previous Morningstar DBRS-rated FIGRE transactions where there is no performance trigger related to Net WA Coupon (WAC) Rate.

Relative to a sequential pay structure, a pro rata structure subject to 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.

Excess cash flows can be used to cover any realized losses and are then used to maintain overcollateralization (OC) at the target. The excess interest can be released to the residual holder if the OC is built to the OC Target so long as the Credit Event does not exist. Please see the Cash Flow Structure and Features section of the related report for more details.

Notable Structural Features
Similar to previous Morningstar DBRS-rated FIGRE transactions, this deal employs a Delinquency Trigger and a Cumulative Loss Trigger. The effective dates for the triggers may differ from prior rated transactions. The Delinquency Trigger is applicable on or after the 12th payment date (July 2025) rather than being applicable immediately after the Closing Date.

Unlike some of the prior FIGRE securitizations that employed a pro-rata pay structure amongst all rated notes, this transaction includes rated classes - Class D, Class E, and Class F, that receive their principal payments after the pro-rata classes (Class A, Class B, and Class C) are paid in full. The inclusion of sequential pay classes retains credit support that would otherwise be reduced in the absence of a credit event.

The OC floor (1.50% of Cut-Off Date balance) is lower than in some of the prior FIGRE securitizations. However, the Class CE notes support B (low)-rated Class F notes, rather than investment-grade classes in those prior deals, and the Class CE, Class F, and Class E notes support the investment-grade classes.

Other Transaction Features
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 P&I 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 or as directed by the Controlling Holder (the holder of more than a 50% interest of the Class CE Notes). For the junior-lien HELOCs, the Servicer will make servicing advances only if such advances are deemed recoverable or if the associate first-lien mortgage has been paid off and such HELOC has become a senior-lien mortgage loan.

The Depositor may, at its option, on or after the earlier of (1) the payment date on which the balance of the Class A Notes is reduced to zero or (2) the date on which the total loans' and real estate owned (REO) properties' balance falls to or below 25% of the loan balance as of the Cut-Off Date (Optional Termination Date), purchase all of the loans and REO properties at the optional termination price described in the transaction documents.

The Depositor, at its option, may purchase any mortgage loan that is 90 days or more delinquent under the MBA method at the repurchase price (Optional Purchase) described in the transaction documents. The total balance of such loans purchased by the Depositor will not exceed 10% of the Cut-Off Date balance.

The Servicer, at a direction of the Controlling Holder, may direct the Issuer to sell (and direct the Indenture Trustee to release its lien on and relinquish its security interest in) eligible nonperforming loans (those 120 days or more delinquent under the MBA method) or REO properties (both, Eligible Nonperforming Loans (NPLs)) to third parties individually or in bulk sales. The Controlling Holder will have a sole authority over the decision to sell the Eligible NPLs, as 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, and
-- Satisfactory third-party due-diligence sample size and compliance review.

The transaction also includes the following challenges:

-- Holder of the Class FR 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 Current Interest, Interest Carryforward Amount, and the Note Amount.

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 Shortfalls.

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 (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 (June 28, 2024) https://dbrs.morningstar.com/research/435279

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.

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 (June 28, 2024),
https://dbrs.morningstar.com/research/435258
-- 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 (June 28, 2024),
https://dbrs.morningstar.com/research/435282
-- Representations and Warranties Criteria for U.S. RMBS Transactions (June 28, 2024),
https://dbrs.morningstar.com/research/435273
-- Legal Criteria for U.S. Structured Finance (April 15, 2024),
https://dbrs.morningstar.com/research/431205
-- Operational Risk Assessment for U.S. RMBS Originators (June 28, 2024),
https://dbrs.morningstar.com/research/435259
-- Operational Risk Assessment for U.S. RMBS Servicers (June 28, 2024),
https://dbrs.morningstar.com/research/435261

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 [email protected].