Rating Action: Moody's assigns provisional ratings to Oceanview Mortgage Loan Trust 2020-1
Global Credit Research - 04 Aug 2020
New York, August 04, 2020 -- Moody's Investors Service, ("Moody's") has assigned provisional ratings to four classes of certificates issued by Oceanview Asset Selector, LLC. The ratings range from (P)Aaa (sf) to (P)A3 (sf). Oceanview Asset Selector, LLC is the sponsor of Oceanview Mortgage Loan Trust 2020-1 (Oceanview 2020-1), the issuer of RMBS bonds backed by a pool of mortgage loans with an aggregate pool balance of approximately $154,154,246 as of the July 1, 2020 cut-off date. This is the sponsor's first prime RMBS transaction.
There are 803 first-lien, seasoned and newly-originated, prime jumbo and government-sponsored enterprise (GSE)- eligible mortgage loans (67.5% by balance), with original terms to maturity of up to 30 years. Specifically, the pool consists of fully amortizing fixed-rate (89.1% by balance) and adjustable-rate (10.9% by balance) loans, backed by non-owner occupied investor properties (65.7% by balance), owner occupied properties (31.7% by balance) and second homes (2.6% by balance). As of the cut-off date, the pool had a weighted average (WA) primary borrower FICO score of 741, WA LTV of 72.7%, and a WA DTI ratio of 34.6%. The pool is a mix of qualified mortgage (QM) loans, non-QM loans, investor loans exempt from the ability to repay (ATR) rules, and pre-ATR loans originated prior to the effective date of the ATR rules.
By balance, approximately 94.8% of the mortgage loans are contractually current, 2.0% are 30-59 days delinquent, and 3.2% are 60-89 days delinquent. All of the mortgage loans that are 30 or more days delinquent as of the cut-off date are loans which were offered initial COVID-19 forbearance relief. Overall, approximately 10.8% of the mortgage loans were offered such relief.
Bayview Loan Servicing, LLC (BLS) will be the servicer. There is no master servicer in this transaction. The servicer earns a base servicing fee of 0.25% per loan, which increases to 1.00% if loans become 60 or more days delinquent. The servicer also earns additional fees for modifying loans. The servicer will be required to make principal and interest (P&I) advances (to the extent deemed recoverable), but must stop advancing after a period of continued six months of advancing. If the servicer fails to make the required advances, the trustee, U.S. Bank National Association (U.S. Bank, long term debt A1; long term deposit Aa1), will be obligated to make them (to the extent deemed recoverable).
The transaction has a sequential payment structure, which is more beneficial to senior bondholders than the shifting-interest structure that is typical of prime and expanded prime transactions.
The complete rating action are as follows.
Issuer: Oceanview Mortgage Loan Trust 2020-1
Cl. A-1-A, Rating Assigned (P)Aaa (sf)
Cl. A-1-B, Rating Assigned (P)Aa1 (sf)
Cl. A-2, Rating Assigned (P)Aa3 (sf)
Cl. A-3, Rating Assigned (P)A3 (sf)
Summary credit analysis and rating rationale
Moody's expected loss for this pool in a baseline scenario-mean is 2.53%, in a baseline scenario-median is 2.03%, and reaches 14.31% at stress level consistent with our Aaa rating.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of US RMBS from the collapse in the US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections.
The contraction in economic activity in the second quarter was severe and the overall recovery in the second half of the year will be gradual. However, there are significant downside risks to our forecasts in the event that the pandemic is not contained and lockdowns have to be reinstated. As a result, the degree of uncertainty around our forecasts is unusually high. We increased our model-derived median expected losses by 15% (12.47% for the mean) and our Aaa losses by 5% to reflect the likely performance deterioration resulting from of a slowdown in US economic activity in 2020 due to the coronavirus outbreak.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
We base our ratings of 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, the representations and warranties (R&W) framework of the transaction, and the degree of alignment of interest between the sponsor and the investors.
Oceanview 2020-1's collateral pool is comprised of 803 first lien mortgage loans with an unpaid principal balance of $154,154,246. Although the pool contains loans with some weaker features, such as 13 borrowers (2.26% by loan balance) that have experienced some forms of prior credit events such as bankruptcy and/or foreclosure (all such loans are contractually current since origination with strong compensating factors), a high percentage of self-employed borrowers (34.8% by loan balance), and 25 non-full documentation loans (4.3% by loan balance), a high percentage of investor loans (65.7% by balance), and some delinquent loans on COVID-19 forbearance plans (5.2% by balance), overall, the majority of the borrowers in the transaction have high FICO scores (WA current FICO score is 741), a high WA total monthly income of $17,901, significant WA liquid cash reserves of $309,560 (approximately 79.4% of the pool have more than 12 months' worth of mortgage payments in reserve), sizeable equity in their properties (WA LTV of 72.7%, CLTV of 72.8%) and a high WA seasoning of 20.2 months. By balance, approximately 27.7% of the mortgage loans are designated as QM loans, 5.8% are non-QM loans, and the rest of the pool are either investor loans exempted from the ATR rules or pre-date the ATR rules.
Oceanview Acquisitions I, LLC (Oceanview or the seller), formed in 2018 and a wholly-owned subsidiary of Oceanview U.S. Holdings Corp (Holdings), acquired the mortgage loans from various lenders through one or more of its affiliates and sold them to the issuer. Lakeview Loan Servicing, LLC, an affiliate of the seller, originated approximately 70.0% of the mortgage loans, by balance. Other lenders originated approximately 30.0% of the pool.
We did not make any additional adjustments to our losses related to the aggregation practices in this securitization, but did increase our losses for some of the originators.
We generally assess originators and aggregators whose loans constitute more than 10% of an RMBS pool, identifying any business strategies, policies, procedures, and underwriting guidelines that could affect their loans' performance. We might make this assessment in a single deal as a part of relevant transaction analysis or use findings from our previously performed originator (or aggregator) review. For originators that contribute 10% or less to the portfolio, we generally gauge the quality and reliability of the loan data through third-party reviews (TPRs), and our review of the aggregator underwriting guidelines, and other relevant origination criteria and processes, in addition to a review of and the originator's past loan performance.
We viewed Lakeview's guidelines, policies and practices as adequate, yet could not meaningfully assess its performance history for lack of significant volume. We increased our base case and Aaa loss expectations for some of the other prime jumbo originators into whose underwriting practices, quality control, credit risk management and performance history we did not have clear insight. We made no adjustments for loans originated by loanDepot.com, LLC, Caliber Home Loans, Inc. and Flagstar Bank, FSB who we consider to be adequate originators of prime jumbo loans. With an exception of two originators, we did not make an adjustment for GSE-eligible loans, regardless of the originator, since such loans were underwritten in accordance with GSE guidelines. We increased our loss assumption for the loans originated by Home Point Financial Corporation (0.5% by balance) due to limited historical performance data, reduced retail footprints which limits the seller's oversight on originations, and lack of strong controls to support recent rapid growth. Also, we increased our loss assumption for the loans originated by Stearns Lending, LLC (2.7% by balance), recently out of bankruptcy.
We consider the overall servicing arrangement for this pool as 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.
There is no master servicer in this transaction. U.S. Bank will be the trust administrator and indenture trustee. However, we did not apply any adjustment to our expected losses for the lack of master servicer due to the following: (1) the servicer will advance six months of scheduled P&I on delinquent mortgages (or earlier if deemed unrecoverable). In the event the servicer is unable to do so, the trustee will step-in to fulfil the six months' P&I advancing obligations (if deemed recoverable); (2) BLS was formed in 2003, is an experienced primary and special servicer of residential mortgage loans, and is an approved servicer for both Fannie Mae and Freddie Mac; (3) although limited in depth and scope, there is still third party oversight of BLS from the GSEs, the CFPB, and state regulators; (4) BLS had no instances of non-compliance for its 2019 Regulation AB or Uniformed Single Audit Program (USAP) independent servicer reviews; (5) BLS has an experienced management team and uses Black Knight's MSP servicing platform, the largest and most highly utilized mortgage servicing system; (6) the complexity of the loan product is low and the pool is generally of good credit quality, reducing the complexity of servicing and reporting; and (7) even if the servicer terminates the servicing agreement, the servicer will continue to service the mortgage loans until a successor servicer is appointed.
For loans 0-59 days delinquent, the servicing fee rate is 0.25% of the loan balance per annum. For loans more than 59 days delinquent, the servicing fee is 1.00% of the loan balance per annum. The servicer is entitled to an additional $1,000.00 per modified loan. Overall, the servicing fee structure appears to be in-line with industry cost to service given the relatively low average loan size in this pool (approximately 190K). However, these fees could potentially rise if the servicer is terminated or resigns. However, such higher fees will be capped at 0.50% and 1.25%, respectively (provided, however, that there will be no limitation on the amounts of any other type of servicing compensation applicable to the successor servicer). In our analysis, we have modeled for and therefore accounted for the risk associated with the potential increase in these servicing fees.
COVID-19 impacted borrowers
Generally, the borrower must initially contact the servicer and attest they have been impacted by a COVID-19 hardship and that they require payment assistance. The servicer will offer an initial forbearance period to the borrower, which can be extended if the borrower attests that they require additional payment assistance. At the end of the forbearance period, if the borrower is unable to make the forborne payments on such mortgage loan as a lump sum payment or does not enter into a repayment plan, the servicer may defer the missed payments, which could be added as a noninterest-bearing payment due at the end of the loan term. If the borrower can no longer afford to make payments in line with the original loan terms, the servicer would typically work with the borrower to modify the loan (although the servicer may utilize any other loss mitigation option permitted under the pooling and servicing agreement with respect to such mortgage loan at such time or anytime thereafter). Of note, per the transaction documents, any amounts deferred to maturity as a non-interest bearing balloon payment is also recognized as a realized loss. Any repayment of such amount is a subsequent recovery.
The sponsor engaged five independent third-party review (TPR) firms for this transaction. AMC Diligence, LLC and Recovco Mortgage Management, LLC performed regulatory/compliance, credit, data integrity and valuation reviews, and Deed Research, Inc. DBA DRI Title & Escrow, Lincoln Abstract & Settlement Services, LLC, and Westcor Land Title Insurance Company performed tax, title and lien reviews. The following reviews were performed: (i) 100% compliance review, (ii) 91.0% title/lien review, (iii) payment string validation on approximately 91.2% (by loan count, with 100% coverage for loans seasoned greater than 365 days as of the securitization cut-off date; for non-seasoned loans, the issuer relied on the pay string data extracted from BLS servicing system which gets updated on a monthly basis), (iv) 100% data integrity review, and (v) 95.5% credit and property review.
While the due-diligence results confirm compliance with the originators' underwriting guidelines for the vast majority of loans and no material regulatory compliance issues, nevertheless, 45 loans displayed a final event grade of "C" for a range of reasons. For many of these loans, the final event grade was not accompanied by detailed explanation of the changes since the initial report and/or no significant compensating factors were documented. We made adjustments in our model analysis to account for this risk.
Furthermore, we consider the products that the property valuation review for this transaction relied on to be weaker than the ones more typically used in prime jumbo transactions we've rated. This transaction's TPR relied almost exclusively on broker price opinions, automated valuation models and Fannie Mae Collateral Underwriter risk scores to validate the property values, whereas other prime jumbo transactions typically incorporate more instances of reliable products such as collateral desk appraisal and field review. In many instances, the valuation products used in this transaction resulted in large variances (in some cases, large negative variances) from the appraised value. After considering the accuracy and quality of the data provided, combined with the scope, depth and results of the third-party valuation review, we made adjustments in our model analysis to account for the risk associated with the reliability of the data and third-party products used.
Lastly, for 28 mortgage loans, the file was missing an appraisal because such loan was approved via a GSE appraisal waiver program. Since the product was only introduced relatively recently, in a positive macro-economic environment, sufficient time has not passed to determine whether the loan level valuation risk related to a GSE loan with an appraisal waiver is the same as a GSE loan with a traditional appraisal due to lack of significant data. To account for the risk associated with this product, we made adjustments in our model analysis to account for the risk associated with such loans.
We assessed the R&W framework based on three factors: (a) the strength of the R&Ws (including qualifiers and sunsets), (b) the effectiveness of the enforcement mechanisms and (c) the financial strength of the R&W provider. 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. The mechanisms for enforcing breaches of R&Ws are generally strong. Unlike some R&W frameworks that prescribe specific tests for the reviewer to perform, the scope of the review is open and not specifically defined. If a material R&W breach is discovered, the R&W provider will be obligated to cure the defect, repurchase the loan, or reimburse any realized loss. An effective R&W framework protects a transaction against the risk of loss from fraudulent or defective loans.
The trust administrator is obligated to hire an independent breach reviewer to perform a review when (a) the mortgage loan (other than a loan subject to coronavirus forbearance) becomes at least 120 days delinquent on any date when a threshold event is in effect or (b) such mortgage loan has incurred a realized loss upon liquidation. As measured on a monthly basis a threshold event will occur on any payment date on which the aggregate principal balance of the delinquent mortgage loans that are 30 days or more delinquent but less than 120 days delinquent, exceeds the Class M1 credit enhancement, as of the closing date.
However, we applied an adjustment to our expected losses to account for the risk that the seller (or Holdings, who backstops the seller's obligations) may be unable to repurchase defective loans in a stressed economic environment, given that the seller is a non-bank entity (unrated) whose monoline business of mortgage origination and servicing is highly correlated with the economy.
Oceanview 2020-1 features a sequential payment structure that benefits the senior bonds more than the shifting-interest structure that is typical of other prime and expanded prime transactions we rate. In addition, the excess spread in this transaction can be used to absorb losses before any excess is released to the sponsor, while in typical prime and expanded prime structures the excess spread is absorbed by the interest-only tranches. The transaction also features up to 6 months of P&I advancing which can be used to pay bondholders in the event of delinquent loans failing to pay interest which would otherwise cause interest shortfalls.
For transactions in which servicers advance on delinquent mortgage loans up to a limited number of days/months of delinquency (i.e. stop-advance features as we have here), we assess the cash flow impact to the relevant tranches based on the allocation of cash flows and reimbursement mechanism in the transaction structure. While the transaction is backed by collateral with overall strong credit characteristics and, as such, we expect strong performance similar to other prime jumbo deals, we have stressed the implied level and timing of delinquencies in the analysis to assess any shortfall risk, especially due to the deterioration in the performance of the underlying mortgage loans as a result of the coronavirus outbreak. Specifically, we considered scenarios in which the delinquency pipeline rises, and interest distribution amounts are reduced. The final ratings on the bonds reflect the additional loss that the bonds may incur due to interest shortfall on the bonds from such stop-advance mechanism. Principal can only be used to reimburse interest shortfalls on the most senior class outstanding.
Interest payments to the bonds will be made using the interest remittance amount; principal will be paid sequentially to all the bonds using the principal remittance amount. Any excess spread will be used to reimburse realized loss, Net WAC shortfalls and unpaid expenses/fees. Realized losses and note write-downs will be allocated in reverse sequential order starting with class B-3.
There is more than 2.5% excess spread (annualized) available in the deal. When excess spread is a form of credit enhancement, it can provide a significant amount of credit protection to investors. However, the amount of protection actually provided by excess spread will depend on: (1) WAC deterioration or yield compression resulting from (i) high-yielding mortgage loans prepaying or defaulting at a faster pace than other mortgage loans; or (ii) modifications of loan interest rates lowering the average rate (2) the speed with which mortgage loans prepay or default during the life of the securitization and (3) The amount of excess spread that "leaks out" of the transaction before it is needed to protect investors. The risk of leakage is typically highest in the early months of a transaction when losses are relatively low.
In our analysis, we accounted for WAC deterioration by applying a 25% haircut to the weighted average interest rate of the mortgage loans in the pool. We used this calculated lower interest rate in our cash flow modeling. Other factors were taken into account by applying a higher prepayment rate in our cash flow model. We applied a CPR of approximately 30% which is higher than 20-25% CPR range in our methodology due to the fact that better credit quality pools tend to prepay faster. Here, the higher prepayment rate was derived based on historical prepayment rates of loans with similar characteristics, for example, such as investor only pools (investor loans in this transaction account for 65.7% by balance).
Factors that would lead to an upgrade or downgrade of the ratings:
Levels 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.
Levels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings of the subordinate bonds 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.
The principal methodology used in these ratings was Moody's Approach to Rating US RMBS Using the MILAN Framework published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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_1240301.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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.
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.
Philip Rukosuev Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Sang Shin VP-Sr Credit Officer/Manager Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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