Morningstar DBRS Finalizes Provisional Credit Ratings on BAMLL 2024-LB1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-LB1 (the Certificates) to be issued by BAMLL 2024-LB1 (the Trust):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)

All trends are Stable.

Bank of America purchased a pool of 745 loans with a current outstanding balance of $1.9 Billion from Washington Federal Bank (d/b/a WaFd Bank) (successor-by-merger to Luther Burbank Savings). The collateral for the pool consists of 745 individual loans secured by 745 multifamily properties with an average cut-off date balance of $2,591,351. None of the mortgage loans are cross-collateralized or cross-defaulted with each other. Given the complexity of the structure and granularity of the pool, Morningstar DBRS applied its North American CMBS Multi-Borrower Rating Methodology (the CMBS Methodology).

The loans were originated between February 2006 and May 2023 (100.0% of the cut-off pool balance), resulting in a weighted-average (WA) seasoning of 48.0 months. The pool has a WA original term length of 359.7 months, or approximately 30 years, and has a WA original amortization term of 359.2 months, or approximately 30 years, resulting in 98.5% amortization over the loan term, based on a Morningstar DBRS stressed interest rate. However, 128 loans, which represent 19.0% of the pool, have an initial interest-only (IO) period of 24 to 60 months. The loans are hybrid adjustable-rate mortgages (ARMs) with a fixed interest rate for three to 10 years followed by an adjustable-rate period for the remainder of the loan term. The pool has a WA current mortgage rate of 4.33%. However, because of the adjustable nature of the loans, Morningstar DBRS stressed the interest rate based on the greater of the 12-month Secured Overnight Financing Rate (SOFR) or the max interest rate per the loan agreement. This resulted in a stressed Morningstar DBRS mortgage rate of 9.54%.

Based on the current loan amount, and the appraised values from loan origination, the pool has a WA loan-to-value ratio (LTV) of 59.2%. Because the date of these appraisals is more than 12 months from the securitization closing, broker opinions of value (BOVs) were provided. Based on the lower of these two values, the pool has a WA LTV of 60.0%. However, Morningstar DBRS made LTV adjustments to 110 loans that had an implied capitalization rate of more than one standard deviation from capitalization rates established by Morningstar DBRS based on market rank and property type. This resulted in a higher Morningstar DBRS LTV of 64.3%.

Lastly, all loans amortize over their respective remaining terms, resulting in 98.5% expected amortization; this amount of amortization is greater than what is typical for commercial mortgage-backed securities (CMBS) conduit pools. Morningstar DBRS' research indicates that, for CMBS conduit transactions securitized between 2000 and 2021, average amortization by year has ranged between 6.5% and 22.0%, with a median rate of 16.5%. As contemplated and explained in Morningstar DBRS' Rating North American CMBS Interest-Only Certificates methodology, the most significant risk to an IO cash flow stream is term default risk. As Morningstar DBRS notes in the methodology, for a pool of approximately 63,000 CMBS loans that had fully cycled through to their maturity defaults, the average total default rate across all property types was approximately 17%, the refinance default rate was 6% (approximately one third of the total default rate), and the term default rate was approximately 11%. Morningstar DBRS recognizes the muted impact of refinance risk on IO certificates by notching the IO rating up by one notch from the Applicable Reference Obligation rating. Therefore, similar logic regarding term default risk supports the rationale for Morningstar DBRS to reduce the loan level probability of default (POD) in the CMBS Insight Model by one notch because refinance risk is largely absent for this pool of loans given most of the loans fully amortize with the overall anticipated amortization at 98.5%.

The Morningstar DBRS CMBS Insight Model does not contemplate the ability to prepay loans, which is generally seen as credit positive because a prepaid loan cannot default. The CMBS predictive model was calibrated using loans that have prepayment lockout features. The historical prepayment performance of those loans is close to a 0% conditional prepayment rate (CPR). If the CMBS predictive model had an expectation of prepayments, Morningstar DBRS would expect the default levels to be reduced. Any loan that prepays is removed from the pool and can no longer default. The loans in the pool generally have prepayment penalties during the first five years of the loan term. Given the seasoned nature of this pool, Morningstar DBRS expects this pool will have prepayments over the remainder of the transaction. As in previous small-balance commercial (SBC) transactions, Morningstar DBRS applied a 5.0% reduction to the cumulative default assumptions to provide credit for expected payments.

The pool has higher stressed interest rates and lending spreads, compared to conduit and agency loans. Consequently, the transaction has an overall Issuer net cash flow debt service coverage ratio (NCF DSCR) of 0.95 times (x) with 502 loans, representing 68.5% of the deal with Issuer NCF DSCR of less than 1.0x, based on the Morningstar stressed mortgage rate. Therefore, Morningstar DBRS applied a 5.0% penalty to the fully adjusted cumulative default assumptions to account for DSCR risks.

The pool is quite diverse based on loan count and size, with an average cut-off date balance of $2,591,351, a concentration profile equivalent to that of a transaction of 468 equal-size loans, and a top 10 loan concentration of 7.6%. Increased pool diversity helps insulate the higher-rated classes from event risk. Though, this diversity is reduced as all the loans in the pool are secured by one property type and 87.7% of the loans are backed by collateral in the state of California. The loans are secured by multifamily property types, which historically have had lower default rates than other asset types. Furthermore, all loans in the pool amortize over their respective remaining loan terms, resulting a 98.5% anticipated amortization, thus reducing refinance risk. Lastly, the loans have a good performance history with only nine loans representing less than 1.0% of the pool balance with late payments in the 24-month pay history ending June 2024.

The loans were not originated for securitization purposes and have limited Representations and Warranties than most typical securitizations. Furthermore, most of the Representations and Warranties that were made will expire in 12 or 18 months. Morningstar DBRS applied a 10% penalty to the POD to mitigate the risk and weaker-than-traditional deal structure. Additionally, the loans have a repurchase option at less than par value. Morningstar DBRS applied a 2.5% penalty to the loss given default (LGD) to mitigate the risk and weaker than traditional CMBS conduit deal structure.

The loans are hybrid ARMs with a fixed interest rate for three to 10 years followed by an adjustable-rate period for the remainder of the loan term. The pool has a WA current mortgage rate of 4.33%. However, because of the adjustable nature of the loans, Morningstar DBRS stressed the interest rate based on the greater of the 12-month SOFR or the max interest rate per the loan agreement. This resulted in a stressed Morningstar DBRS mortgage rate of 9.5%. This stressed interest rate produced a WA Issuer NCF DSCR of 0.95x. Morningstar DBRS applied a 5% penalty to the POD to mitigate the risk associated with the very low DSCR.

Morningstar DBRS did not perform site inspections on loans within its sample for this transaction. Instead, Morningstar DBRS relied upon analysis of third-party reports and online searches to determine property quality assessments. Of the 59 loans Morningstar DBRS sampled, one was Average+ quality (2.4%), seven were Average quality (18.9%), 29 were Average - quality (52.9%), 16 were Below Average quality (25.3%), and one was Poor quality (0.5%). Morningstar DBRS assumed unsampled loans were Average - quality, which has a slightly increased POD level. This is consistent with the assessments of sampled loans and other SBC transactions rated by Morningstar DBRS.

Limited or dated property-level third party reports were available for Morningstar DBRS to review. Morningstar DBRS received and reviewed appraisals for sampled loans for the top 29 of the pool, which represent 15.6% of the pool balance. These appraisals were issued between November 2015 and September 2022 when the respective loans were originated. Furthermore, BOVs conducted between July 2024 and October 2024 were provided on all loans. Morningstar DBRS was able to perform a loan-level cash flow analysis on the top 29 loans in the pool. The NCF haircuts to these loans ranged from 2.4% to 23.1%, with an average of 11.4% when excluding outliers. No Property Condition Assessment reports were provided. Morningstar DBRS applied a higher than typical capital expense assumption in its NCF analysis, based on the Morningstar DBRS assessed property quality. No Environmental Site Assessment reports were provided nor required by the Issuer; however, Partner Engineering did perform a comprehensive desktop/database review of all loans in the pool. Of the 745 loans, Partner identified 14, representing 1.8% of the pool, to have on-site concerns and seven loans, 1.0% of the pool, with known on-site contamination. Morningstar DBRS made LGD adjustments to eight loans, 1.0% of the pool, to mitigate potential environmental concerns. No probable maximum loss (PML) information or earthquake insurance requirements was provided. Therefore, an LGD penalty was applied to all properties in California to mitigate this potential risk. This penalty was assigned to 87.7% of the pool.

Morningstar DBRS received limited borrower information, net worth or liquidity information, and credit histories. Morningstar DBRS generally initially assumed loans had Weak sponsorship scores, which increases the stress on the default rate. The initial assumption of Weak reflects the generally less sophisticated nature of small balance borrowers and assessments from past small balance transactions rated by Morningstar DBRS. Furthermore, Morningstar DBRS received a 24-month pay history on each loan through June 2024. If any loan had more than two late payments within this period or was currently 30 days past due, Morningstar DBRS applied an additional stress to the default rate. This occurred for nine loans, representing 0.9% of the pool balance. Lastly, Morningstar DBRS views recourse loans as credit positive, but because of the generally less sophisticated nature of small balance borrowers, we assume recourse loans as credit-neutral. Therefore, for 174 loans, representing 25.1% of the pool without recourse, Morningstar DBRS applied an additional stress to the default rate.

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 are the Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

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   
General Considerations 
ESG considerations had a significant effect on the credit analysis.

Environmental (E) Factors   
The following Emissions, Effluents, and Waste factor had a significant effect on the credit analysis: Partner Engineering performed a comprehensive desktop/database review of all loans in the pool. Morningstar DBRS made LGD adjustments to eight loans, 1.0% of the pool, to mitigate potential environmental concerns with known on-site or adjacent-site contamination.

There were no Social or 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) at https://dbrs.morningstar.com/research/437781.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Multi-Borrower Rating Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428797.

Other methodologies referenced in this transaction are listed at the end of this press release.

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Insight Model v 1.2.0.00, https://dbrs.morningstar.com/research/428797

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