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Moody's assigns provisional ratings to Prime RMBS issued by OBX 2022-INV1 Trust

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Rating Action: Moody's assigns provisional ratings to Prime RMBS issued by OBX 2022-INV1 TrustGlobal Credit Research - 20 Jan 2022New York, January 20, 2022 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to 48 classes of residential mortgage-backed securities (RMBS) issued by OBX 2022-INV1 Trust (OBX 2022-INV1). The ratings range from (P)Aaa (sf) to (P)B3 (sf).OBX 2022-INV1, the first rated issue from Onslow Bay Financial LLC (Onslow Bay) in 2022, is a prime RMBS securitization of 10 to 30-year fixed-rate, agency-eligible mortgage loans secured by first liens on mainly non-owner occupied residential properties (designated for investment purposes by the borrower). All the loans were underwritten using one of the government-sponsored enterprises' (GSE) automated underwriting systems (AUS) and 100.0% by unpaid principal balance (UPB) received an "Approve" or "Accept" recommendation. As of the cut-off date, no borrower under any mortgage loan is currently in an active Covid-19 related forbearance plan with the related servicer.Onslow Bay does not originate residential mortgage loans. Onslow Bay, the seller/sponsor, purchased approximately 33.5%, 11.9% and 10.4% by UPB, from Rocket Mortgage, LLC (Rocket Mortgage; f/k/a Quicken Loans, LLC, rated Ba1 (CFR) with Positive outlook), Better Mortgage Corporation and LendUS, LLC (LendUS), respectively, and the remainder from various other mortgage originators.Select Portfolio Servicing, Inc. and Rocket Mortgage LLC (Rocket) will service 66.6% and 33.4% (by UPB) of the mortgage loans respectively on behalf of the issuing entity, starting January 1, 2022. Computershare Trust Company, N.A. (Computershare) will act as master servicer. Certain servicing advances and advances for delinquent scheduled interest and principal payments will be funded unless the related mortgage loan is 120 days or more delinquent or the servicer determines that such delinquency advances would not be recoverable. The master servicer is obligated to fund any required monthly advances if the servicer fails in its obligation to do so. The master servicer and servicer will be entitled to reimbursements for any such monthly advances from future payments and collections with respect to those mortgage loans.The sponsor, directly or through a majority-owned affiliate, intends to retain an eligible horizontal residual interest with a fair value of at least 5% of the aggregate fair value of the notes issued by the trust.OBX 2022-INV1 has a shifting interest structure with a five-year lockout period that benefits from a senior subordination floor and a subordination floor. In our analysis of tail risk, we considered the increased risk from borrowers with more than one mortgage in the pool.The complete rating actions are as follows:Cl. A-1, Assigned (P)Aaa (sf)Cl. A-2, Assigned (P)Aaa (sf)Cl. A-3, Assigned (P)Aaa (sf)Cl. A-4, Assigned (P)Aaa (sf)Cl. A-5, Assigned (P)Aaa (sf)Cl. A-6, Assigned (P)Aaa (sf)Cl. A-7, Assigned (P)Aaa (sf)Cl. A-8, Assigned (P)Aaa (sf)Cl. A-9, Assigned (P)Aaa (sf)Cl. A-10, Assigned (P)Aaa (sf)Cl. A-11, Assigned (P)Aaa (sf)Cl. A-11IO*, Assigned (P)Aaa (sf)Cl. A-12, Assigned (P)Aaa (sf)Cl. A-13, Assigned (P)Aaa (sf)Cl. A-14, Assigned (P)Aaa (sf)Cl. A-15, Assigned (P)Aaa (sf)Cl. A-16, Assigned (P)Aaa (sf)Cl. A-17, Assigned (P)Aaa (sf)Cl. A-18, Assigned (P)Aa1 (sf)Cl. A-19, Assigned (P)Aa1 (sf)Cl. A-20, Assigned (P)Aa1 (sf)Cl. A-21, Assigned (P)Aaa (sf)Cl. A-22, Assigned (P)Aaa (sf)Cl. A-23, Assigned (P)Aaa (sf)Cl. A-24, Assigned (P)Aaa (sf)Cl. A-IO1*, Assigned (P)Aaa (sf)Cl. A-IO4*, Assigned (P)Aaa (sf)Cl. A-IO5*, Assigned (P)Aaa (sf)Cl. A-IO6*, Assigned (P)Aaa (sf)Cl. A-IO8*, Assigned (P)Aaa (sf)Cl. A-IO10*, Assigned (P)Aaa (sf)Cl. A-IO13*, Assigned (P)Aaa (sf)Cl. A-IO15*, Assigned (P)Aaa (sf)Cl. A-IO17*, Assigned (P)Aaa (sf)Cl. A-IO20*, Assigned (P)Aa1 (sf)Cl. A-IO21*, Assigned (P)Aa1 (sf)Cl. A-IO24*, Assigned (P)Aaa (sf)Cl. B-1, Assigned (P)Aa3 (sf)Cl. B-1A, Assigned (P)Aa3 (sf)Cl. B-IO1*, Assigned (P)Aa3 (sf)Cl. B-2, Assigned (P)A2 (sf)Cl. B-2A, Assigned (P)A2 (sf)Cl. B-IO2*, Assigned (P)A2 (sf)Cl. B-3, Assigned (P)Baa2 (sf)Cl. B-3A, Assigned (P)Baa2 (sf)Cl. B-IO3*, Assigned (P)Baa2 (sf)Cl. B-4, Assigned (P)Ba2 (sf)Cl. B-5, Assigned (P)B3 (sf)*Reflects Interest-Only ClassesRATINGS RATIONALESummary Credit Analysis and Rating RationaleMoody's expected losses in a base case scenario are 0.91% and reach 5.41% at a stress level consistent with our Aaa rating scenario.We base our ratings on the notes on the credit quality of the mortgage loans, the structural features of the transaction, our assessments of the origination quality and servicing arrangement, the strength of the third-party due diligence and the R&W framework of the transaction.Collateral DescriptionThe OBX 2022-INV1 transaction is a securitization of 1,236 agency-eligible mortgage loans, secured by 10 to 30-year fixed-rate, mainly non-owner occupied first liens on one-to four-family residential properties, planned unit developments, condominiums and townhouses with an unpaid principal balance of approximately $377,275,348. The notes are backed by 99.3% investment property mortgage loans and the remaining 0.7% are second home loans. The mortgage pool has a WA seasoning of about 5 months. The loans in this transaction have strong borrower credit characteristics with a weighted average current FICO score of 771 and a weighted-average original combined loan-to-value ratio (CLTV) of 63.9%. In addition, 14.3% of the borrowers are self-employed and refinance loans comprise about 56.6% of the aggregate pool. The pool has a high geographic concentration with 37.4% of the aggregate pool located in California, with 10.9% located in the Los Angeles-Long Beach-Anaheim MSA and 6.0% located in the San Francisco-Oakland-Hayward MSA. The characteristics of the loans underlying the pool are generally comparable to other recent prime RMBS transactions backed by investment property mortgage loans that we have rated.As of the cut-off date, no borrower under any mortgage loan is currently in an active Covid-19 related forbearance plan with the related servicer. However, there was one loan that was previously in a Covid-19 forbearance plan (0.1% by UPB) from April 2020 to July 2020, but it is current on payment status. In the event that, after cut-off date, a borrower enters into or requests an active Covid-19 related forbearance plan, such mortgage loan will remain in the mortgage pool. Furthermore, there are also four loans (0.3% by UPB) that are 30-day delinquent as per MBA Method due to servicing transfer.Appraisal Waiver (AW) loans, all of which are agency-eligible loans, which constitute approximately 2.1% of the mortgage loans by aggregate cut-off date balance, may present a greater risk as the value of the related mortgaged properties may be less than the value ascribed to such mortgaged properties. We made an adjustment in our analysis to account for the increased risk associated with such loans. However, we have tempered this adjustment by taking into account the GSEs' robust risk modeling, which helps minimize collateral valuation risk, as well as the GSEs' conservative eligibility requirements for AW loans which helps to support deal collateral quality.Origination QualityMajority of the mortgage loans in the pool were originated by Rocket Mortgage, Better Mortgage Corporation, LendUS, LLC, General Mortgage Capital Corporation and AmeriFirst Financial, Inc. All other originators represent less than 5.0% by loan balance. All the mortgage loans comply with Freddie Mac and Fannie Mae underwriting guidelines, with 100.0% receiving an "Approve" or "Accept" recommendation, which take into consideration, among other factors, the income, assets, employment and credit score of the borrower.With exception for loans originated by Rocket Mortgage (approximately 33.5% by UPB) and LendUS (approximately 10.4% by UPB), we did not make any adjustments to our base case and Aaa stress loss assumptions, regardless of the originator, since the loans were all underwritten in accordance with GSE guidelines.We increased our loss assumption for loans originated by Rocket Mortgage due to the relatively weaker performance of their investment property mortgage transactions compared to similar transactions from other originators. We increased our loss assumption for loans originated by LendUS due to insufficient performance information.Servicing ArrangementWe consider the overall servicing arrangement for this pool to be adequate, and as a result we did not make any adjustments to our base case and Aaa stress loss assumptions based on the servicing arrangement.Select Portfolio Servicing, Inc. (SPS) and Rocket Mortgage, LLC (Rocket) will be the named primary servicer for this transaction and will service 66.6% and 33.4% of the pool respectively, starting January 1, 2022. Computershare will act as master servicer and as custodian under the custodial agreement. Computershare is a national banking association and a wholly-owned subsidiary of Computershare Ltd (Baa2, long term rating), an Australian financial services company with over $5 billion (USD) in assets as of June 30, 2021. Computershare Ltd and its affiliates have been engaging in financial service activities, including stock transfer related services since 1997, and corporate trust related services since 2000.The P&I Advancing Party (Onslow Bay) will make principal and interest advances (subject to a determination of recoverability) for the mortgage loans but only to the extent that such delinquency advances are not funded by amounts held for future distribution, a reduction in the excess servicing strip fee or a reduction in the P&I advancing party fee.Similarly to the OBX 2021-INV3 transaction we have rated, and in contrast to the OBX 2021-J shelf, no advances of delinquent principal or interest will be made for mortgage loans that become 120 days or more delinquent under the MBA method. Subsequently, if there are mortgage loans that are 120 days or more delinquent on any payment date, there will be a reduction in amounts available to pay principal and interest otherwise payable to note holders. We did not make an adjustment for the stop advance feature due to the strong reimbursement mechanism for liquidated mortgage loans. Proceeds from liquidated mortgage loans are included in the available distribution amount and are paid according to the waterfall.Third Party Review (TPR)Four independent TPR firms, AMC Diligence, LLC (AMC), Inglet Blair, LLC, Canopy Financial Technology Partners, LLC and Recovco Mortgage Management, LLC were engaged to conduct due diligence for the credit, compliance, property valuation and data integrity for approximately 79.2% of the final mortgage pool (by loan count). The original population included 1,041 loans in the initial securitized pool. During the course of the review, 62 loans were removed for various reasons. The final population of the review consisted of 979 loans in the final securitized pool. The TPR results indicated compliance with the originators' underwriting guidelines for most of the loans without any material compliance issues or appraisal defects. 100.0% of the loans reviewed in the final population received a grade B or higher with 94.8% of loans receiving an A grade.Representations & Warranties (R&W)Our analysis of the R&W framework considers the adequacy of the R&Ws and enforcement mechanisms, and the creditworthiness of the R&W provider.Overall, the loan-level R&Ws are strong and, in general, either meet or exceed the baseline set of credit-neutral R&Ws we identified for US RMBS. Among other considerations, the R&Ws address property valuation, underwriting, fraud, data accuracy, regulatory compliance, the presence of title and hazard insurance, the absence of material property damage, and the enforceability of the mortgage.Each originator will provide comprehensive loan level representations and warranties for their respective loans. BANA will assign each originator's R&W to the seller (OBX) through AAR, who will in turn assign to the depositor, which will assign to the trust. To mitigate the potential concerns regarding the originators' ability to meet their respective R&W obligations, Onslow Bay Financial LLC (the seller, an unrated party) will backstop the R&Ws for all originator's loans. The R&W provider's obligation to backstop third party R&Ws will terminate 5 years after the closing date, subject to certain performance conditions. The R&W provider will also provide the gap reps. The rep provider is an unrated entity with weak financial that may not have the financial wherewithal to purchase defective loans. We have increased our loss levels to account for the financial weakness of the R&W provider (Onslow Bay).Tail Risk and Subordination FloorThe transaction cash flows follow a shifting interest structure that allows subordinated bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool balance declines, senior bonds are exposed to eroding credit enhancement over time, and increased performance volatility, as a result. To mitigate this risk, the transaction provides for a senior subordination floor of 1.00% of the closing pool balance, and a subordination lock-out amount equal to 1.00% of the closing pool balance. The floors are consistent with the credit neutral floors for the assigned ratings according to our methodology.Factors that would lead to an upgrade or downgrade of the ratings:DownLevels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody's original expectations as a result of a higher number of obligor defaults or deterioration in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.UpLevels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline from Moody's original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market.MethodologyThe principal methodology used in rating all classes except interest-only classes was "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1271478. The methodologies used in rating interest-only classes were "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1271478 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179. Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. Please note that a Request for Comment was published in which Moody's requested market feedback on potential revisions to one or more of the methodologies used in determining these Credit Ratings. If the revised methodologies are implemented as proposed, it is not currently expected that the Credit Ratings referenced in this press release will be affected. Request for Comments can be found on the rating methodologies page on www.moodys.com.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1316881.The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. James Huh Associate Lead Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​