Morningstar DBRS Finalizes Provisional Credit Ratings on Saluda Grade Alternative Mortgage Trust 2025-LOC4

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following Mortgage-Backed Notes, Saluda Grade Alternative Mortgage Trust Asset-Backed Securities, Series 2025-LOC4 (the Notes) issued by Saluda Grade Alternative Mortgage Trust 2025-LOC4 (GRADE 2025-LOC4 or the Trust):

-- $247.4 million Class A-1A at AAA (sf)
-- $35.6 million Class A-1B at AAA (sf)
-- $16.5 million Class M-1 at AA (low) (sf)
-- $14.8 million Class M-2 at A (low) (sf)
-- $13.5 million Class M-3 at BBB (low) (sf)
-- $13.2 million Class B-1 at BB (low) (sf)
-- $7.6 million Class B-2 at B (low) (sf)

The AAA (sf) credit ratings on the Notes reflect 20.45% of credit enhancement provided by subordinate notes. The AA (low) (sf), A (low) (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) credit ratings reflect 15.80%, 11.65%, 7.85%, 4.15%, and 2.00% of credit enhancement, respectively.

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

The transaction is a securitization of recently originated first- and junior-lien revolving home equity lines of credit (HELOCs) funded by the issuance of asset-backed securities (the Notes). The Notes are backed by 2,932 loans with a total unpaid principal balance (UPB) of $355,660,960 and a total current credit limit of $433,256,273 as of the Cut-Off Date (May 31, 2025).

The portfolio, on average, is three months seasoned, though seasoning ranges from zero to 27 months. All the HELOCs are current and 97.5% have never been 30 or more (30+) days delinquent since origination. All 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.

GRADE 2025-LOC4 represents the sixth securitization of 100% HELOCs by the Sponsor, Saluda Grade Opportunities Fund LLC (Saluda Grade). The performance of the previous transactions to date has been satisfactory.

HELOC Features
In this transaction, all loans are open-HELOCs that have a draw period three, five, or 10 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. After the draw term, HELOC borrowers have a repayment period ranging from five to 25 years and are no longer allowed to draw. All HELOCs in this transaction are floating-rate loans with interest-only (IO) payment periods aligned with their draw 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. While these HELOCs do not need to be fully drawn at origination, the weighted-average (WA) utilization rate of approximately 93.2% after three months of seasoning on average.

Transaction and Other Counterparties
The mortgages were originated by Homebridge Financial Services, Inc. and its affiliates (49.9%), Better Mortgage Corporation (18.2%) and Angel Oak Mortgage Solutions LLC (14.6%) as well as other originators each comprising less than 10.0% of the pool by balance.

Shellpoint will service all loans within the pool for a servicing fee of 0.20% per year. Wilmington Savings Fund Society, FSB (WSFS Bank) will serve as the Indenture Trustee, Delaware Trustee, Paying Agent, Note Registrar, and Certificate Registrar. WSFS Bank will also serve as the Custodian along with Wilmington Trust, National Association.

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 G Certificates.

If the aggregate draws exceed the principal collections (Net Draw), Goldman Sachs Bank USA (rated A (high) with a Stable trend by Morningstar DBRS), as the VFL Lender, will be required to advance any such Net Draw up to the amount of $20,000,000 (VFL Commitment Amount) until June 2030. If the VFL Lender is not obligated to advance such amount, or after June 2030, the holder of the Issuer Trust Certificate will be required to fund any such portion of Net Draws. The Certificate Principal Balance of the Class G Certificates will increase by any such amount remitted by the VFL Lender or the holder of the Issuer Trust Certificate, as applicable. Saluda Grade, as holder of the Issuer Trust Certificates, will have an ultimate responsibility to ensure draws are funded as long as all borrower conditions are met to warrant draw funding.

In its analysis of the proposed transaction structure, Morningstar DBRS does not rely on the creditworthiness of either the Servicer or Saluda Grade. Rather, the analysis relies on the creditworthiness of the VFL Lender and the assets' ability to generate sufficient cash flows 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.

Similar to other transactions backed by junior-lien mortgage loans or HELOCs, in this transaction, any HELOCs, including first and junior liens, that are 180 days delinquent under the Mortgage Bankers Association (MBA) delinquency method will be charged off.

Transaction Structure
The transaction employs a pro rata cash flow structure subject to a Credit Event, which is based on certain performance trigger events related to cumulative losses and delinquencies. If a Credit Event is in effect, principal distributions are made sequentially. Cumulative Loss and Delinquency Trigger Events are applicable immediately after the Closing Date.

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

Other Transaction Features
The Sponsor or a majority-owned affiliate of the Sponsor will acquire and intends to retain an eligible vertical interest consisting of 5% of each class of Notes to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. The required credit risk must be held 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.

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 principal and interest (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.

On any payment date on or after three years after the closing date or the first payment date when the unpaid principal balance falls to or below 20% of the Cut-Off Date UPB, the Issuer, at the direction of the Controlling Holder, may exercise a call and purchase all of the outstanding Notes at the redemption price (Optional Redemption) described in the transaction documents.

The credit ratings reflect transactional strengths that include the following:

-- Robust equity and prime and near-prime credit quality,
-- Certain HELOC attributes,
-- Current loan status,
-- Satisfactory framework to fund borrower draw requests, and
-- Satisfactory third-party due-diligence sample size and compliance review.

The transaction also includes the following challenges:

-- 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 Interest Payment Amount, Interest Carryforward Amount, and the Class Principal Balance.

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. 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 factor(s) 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 (May 16, 2025) https://dbrs.morningstar.com/research/454196.

Notes:
All figures are in US 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 (January 02, 2025) https://dbrs.morningstar.com/research/445477.

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-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.

-- RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model (Version 1.3.29.1)
https://dbrs.morningstar.com/research/445477
-- Interest Rate Stresses for U.S. Structured Finance Transactions (March 27, 2024),
https://dbrs.morningstar.com/research/450750
-- 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 (December 3, 2024),
https://dbrs.morningstar.com/research/444064
-- Operational Risk Assessment for U.S. RMBS Originators and Servicers (September 30, 2024), https://dbrs.morningstar.com/research/440086

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