Morningstar DBRS Assigns Provisional Credit Ratings to Saluda Grade Alternative Mortgage Trust 2024-INV1

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the Mortgage Pass-Through Certificates, Series 2024-INV1 (the Certificates) to be issued by Saluda Grade Alternative Mortgage Trust 2024-INV1 (GRADE 2024-INV1) as follows:

-- $101.9 million Class A-1 at AAA (sf)
-- $10.3 million Class A-2 at AA (sf)
-- $9.4 million Class A-3 at A (sf)
-- $7.9 million Class M-1 at BBB (sf)
-- $6.5 million Class B-1 at BB (sf)
-- $7.8 million Class B-2 at B (sf)

The AAA (sf) credit rating on the Class A-1 Certificate reflects 33.30% of credit enhancement provided by subordinated certificates. The AA (sf), A (sf), BBB (sf), BB (sf), and B (sf) credit ratings reflect 26.55%, 20.40%, 15.20%, 10.95%, and 5.85% of credit enhancement, respectively.

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

GRADE 2024-INV1 is a securitization of a portfolio of fixed- and adjustable-rate, investor debt service coverage ratio (DSCR), first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 603 mortgage loans (728 properties) with a total principal balance of $152,805,162 as of the Cut-Off Date (June 30, 2024).

GRADE 2024-INV1 represents the second securitization issued by the Sponsor, Saluda Grade Opportunities Fund LLC (Saluda Grade), backed by business purpose investment property loans underwritten using DSCR. The top three originators for the mortgage pool are CV3 Alpha Trust (40.9%), CIVIC Financial Services, LLC (27.1%), and Housemax Funding LLC (13.7%). Fay Servicing, LLC (81.9%) and NewRez LLC d/b/a Shellpoint Mortgage Servicing (18.1%) are the Servicers of the loans in this transaction. U.S. Bank Trust Company, National Association (rated AA with a Stable trend by Morningstar DBRS) will act as the Trustee and Securities Administrator. U.S. Bank National Association will act as the Custodian.

The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor's credit profile, and the DSCR, where applicable. Because the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau's Ability-to-Repay (ATR) rules and TILA/RESPA Integrated Disclosure rule.

The Sponsor, or an affiliate, will retain a portion of each class of the Certificates (other than the Class R Certificates), representing an eligible vertical interest of at least 5% of the aggregate fair value of the Certificates to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure. Additionally, the Sponsor, or an affiliate, will initially own the remainder of the Class B-3, A-IO-S, X, and P Certificates on the Closing Date.

The Depositor will have the option on any date on or after 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, to purchase all outstanding certificates at the redemption price specified in the transaction documents, (optional redemption). An optional redemption will be followed by a qualified liquidation of each trust REMIC.

The Sponsor or the Depositor will have the option, but not the obligation, to repurchase any mortgage loan that becomes 60 or more days delinquent under the Mortgage Bankers Association Method at the Repurchase Price (par plus interest), provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

For this transaction, neither Servicer nor any other transaction party will fund advances on delinquent principal and interest (P&I) on any mortgage. However, the Servicers are obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances).

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the Class A-1, A-2, and A-3 Certificates (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 Certificates (IIPP) before being applied sequentially to amortize the balances of the senior and subordinated certificates. For all other classes, principal proceeds can be used to cover interest shortfalls after the more senior classes are paid in full (IPIP).

Excess spread can be used to cover realized losses before being allocated to unpaid Cap Carryover
Amounts due to Class A-1 down to M-1. The Class A-1, A-2, and A-3 fixed rate coupons step up by 1.00% on and after the distribution date in August 2028 (Step-Up Date). After the step-up date, on each distribution date, interest and principal otherwise available to pay the Class B-3 interest and interest shortfalls may be used to pay any Class A Cap Carryover amounts.

The credit ratings reflect transactional strengths that include the following:
-- Improved underwriting standards;
-- Certain loan attributes;
-- Robust pool composition; and
-- Satisfactory third-party due-diligence review

The transaction also includes the following challenges:
-- 100% investor loans;
-- No servicer advances of delinquent P&I;
-- Representations and warranties framework; and
-- No operational risk review on originators comprising over 15% of the pool.

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

Morningstar DBRS' credit rating 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 Class Balance.

Morningstar DBRS' credit ratings on Classes A-1, A-2, and A-3 also address the credit risk associated with the increased rate of interest applicable to these Certificates if they remain outstanding on the step-up date (August 2028) in accordance with the applicable transaction documents.

Morningstar DBRS' credit rating does 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.

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
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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned Certificates 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 Certificates 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.
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

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