Morningstar DBRS Assigns Provisional Credit Ratings to ACRA Trust 2024-NQM1

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the Mortgage-Backed Notes, Series 2024-NQM1 (the Notes) to be issued by ACRA Trust 2024-NQM1 (the Issuer) as follows:

-- $251.0 million Class A-1 at (P) AAA (sf)
-- $214.9 million Class A-1A at (P) AAA (sf)
-- $36.1 million Class A-1B at (P) AAA (sf)
-- $23.9 million Class A-2 at (P) AA (high) (sf)
-- $26.6 million Class A-3 at (P) A (high) (sf)
-- $18.6 million Class M-1A at (P) BBB (high) (sf)
-- $16.4 million Class M-1B at (P) BBB (low) (sf)
-- $9.6 million Class B-1 at (P) BB (sf)
-- $9.2 million Class B-2 at (P) B (sf)

Class A-1 is an exchangeable note and Class A-1A and A-1B are initial exchangeable notes. These classes can be exchanged in combinations as specified in the offering documents.

The AAA (sf) credit rating on the Class A-1 Notes reflects 30.55% of credit enhancement provided by the subordinated notes. The AA (high) (sf), A (high) (sf), BBB (high) (sf), BBB (low) (sf), BB (sf), and B (sf) credit ratings reflect 23.95%, 16.60%, 11.45%, 6.90%, 4.25%, and 1.70% 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 fixed- and adjustable-rate expanded prime and nonprime first-lien residential mortgages funded by the issuance of the Notes. The notes are backed by 787 mortgage loans with a total principal balance of $361,456,124 as of September 30, 2024 (the Cut-Off Date).

ACRA 2024-NQM1 represents the second RMBS securitization issued by the Sponsor, Citadel Servicing Corporation. The pool is, on average, two months seasoned with loan ages ranging from one to four months. The originator and servicer of the mortgages is Citadel Servicing Corporation (CSC) doing business as Acra Lending. ServiceMac, LLC will subservice all but 21 of the loans on behalf of CSC.

Computershare Trust Company, N.A., (rated BBB with a Stable trend by Morningstar DBRS) will act as Indenture Trustee, Paying Agent, Note Registrar, Certificate, and Custodian. Computershare Delaware Trust Company will act as Owner Trustee.

As of the Cut-Off Date, all of the loans in the pool are contractually current according to the Mortgage Bankers Association (MBA) delinquency calculation method.

In accordance with the Consumer Financial Protection Bureau (CFPB) Qualified Mortgage (QM) rules, 51.0% of the loans by balance are designated as non-QM. Approximately 48.3% of the loans in the pool made to investors for business purposes are exempt from the CFPB Ability-to-Repay (ATR) and QM rules. Remaining loans subject to the ATR rules are designated as QM Safe Harbor (0.7%) by UPB.

There will be no advancing of delinquent principal or interest on any mortgage loan by the servicer or any other party to the transaction; however, each servicer is obligated to make advances in respect of taxes and insurance; the cost of preservation, restoration, and protection of mortgaged properties; and any enforcement or judicial proceedings, including foreclosures and reasonable costs and expenses incurred in the course of servicing and disposing of properties.

The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible horizontal residual interest consisting of a portion of the Class B-3 Notes and 100% of the Class XS Notes, collectively representing at least 5.0% of the aggregate fair value of the Notes (other than the Class R Notes) to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder.

The holder of the Trust Certificates may, at its option, on or after the earlier of (1) the payment
date in October 2027 or (2) the date on which the balance of mortgage loans and real estate owned properties falls to or below 30% of the loan balance as of the Cut-Off Date (Optional Redemption Date), redeem the Notes 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 transaction's cash flow structure is generally similar to that of other non-QM securitizations. The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Credit Event). In the case of a Credit Event, principal proceeds will be allocated to cover interest shortfalls on the Class A-1A and then A-1B, then in reduction of the Class A-1A note balance, before a similar allocation to the Class A-1B (IIPP). However, in such cases of credit events, principal proceeds will be allocated to cover interest shortfalls to the Class-A2 only after the balance of the more senior notes have been paid off. 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 Class A-1A, Class A1-B, A-2, A-3, M-1A, and M1-B.

Of note, the Class A-1A, A-1B, A-2, and A-3 Notes coupon rates step up by 100 basis points on and after the payment date in October 2028. Beginning in November 2028, funds otherwise payable to the Class B-3 Notes as accrued and unpaid interest may be used to pay the Class A-1A, A-1B, A-2, and A-3 Notes Cap Carryover Amounts after the Class A coupons step up.

The credit ratings reflect transactional strengths that include the following:
-- Robust pool composition;
-- Improved underwriting standards;
-- Satisfactory third-party due-diligence review;
-- Current loan status; and
-- Compliance with the ATR rules.

The transaction also includes the following challenges:
-- Investor debt service coverage ratio and no ratio loans;
-- Nonprime, non-QM, investor loans, and loans to foreign national borrowers;
-- No servicer advances of delinquent principal and interest; and
-- Representations and warranties framework.

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

Morningstar DBRS' credit rating on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release. The associated financial obligations for each of the rated Notes are the related Current Interest, any Interest Carryforward Amount, and the related Note Amount.

Morningstar DBRS' credit ratings on Classes A-1, A-1A, A-1B, A-2, and A-3 also address the credit risk associated with the increased rate of interest applicable to these Notes if they remain outstanding on the step-up date (November 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' 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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 (September 30, 2024) https://dbrs.morningstar.com/research/440090.

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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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
-- Third-Party Due-Diligence and Representations & Warranties Criteria for U.S. RMBS Transactions (September 30, 2024)
https://dbrs.morningstar.com/research/440091
-- Legal Criteria for U.S. Structured Finance (April 15, 2024),
https://dbrs.morningstar.com/research/431205
-- Operational Risk Assessment for U.S. RMBS Originators and Servicers (September 30, 2024)
https://dbrs.morningstar.com/research/440086
-- U.S. Residential Mortgage Originator Rankings (June 28, 2024)
https://dbrs.morningstar.com/research/435288

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 info-DBRS@morningstar.com.