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Presale:
Starwood Mortgage Residential Trust 2020-3August 3, 2020
Preliminary Ratings
Class Rating(i) Amount ($)Interest rate(%)(ii)
Credit enhancement(%)(iii) Class type
A-1 AAA (sf) 368,887,000 Fixed 24.10 Senior
A-2 AA (sf) 22,356,000 Fixed 19.50 Senior
A-3 A (sf) 35,237,000 Fixed 12.25 Senior
M-1 BBB (sf) 22,356,000 Fixed 7.65 Mezzanine
B-1 BB (sf) 16,768,000 Fixed 4.20 Subordinate
B-2 B (sf) 11,178,000 Fixed 1.90 Subordinate
B-3 NR 9,235,241 Net WAC N/A Subordinate
A-IO-S NR Notional(iv) (v) N/A Excess strip
XS NR Notional(iv) (vi) N/A Excess cash flow
A-R NR N/A N/A N/A Residual
This presale report is based on information as of Aug. 3, 2020.
The ratings shown are preliminary. Subsequent information may
result in theassignment of final ratings that differ from the
preliminary ratings. Accordingly, the preliminary ratings should
not be construed as evidence offinal ratings. This report does not
constitute a recommendation to buy, hold, or sell securities.
(i)The collateral and structural information inthis report reflects
the term sheet dated July 29, 2020. The preliminary ratings address
the ultimate payment of interest and principal.(ii)Interest can be
deferred on the classes. Fixed coupons are subject to the pool's
net WAC rate, and the class B-3 coupon equals net WAC.(iii)This
credit enhancement is solely from subordination. Excess spread also
provides credit enhancement. (iv)The notional amount will equalthe
aggregate stated principal balance of the mortgage loans as of the
first day of the related due period. (v)Excess servicing strip
minusservicing fees and compensating interest. (vi)Entitled to
certain excess amounts. WAC--Weighted average coupon. N/A--Not
applicable.NR--Not rated.
Profile
Expected closing date Aug. 7, 2020.
Cut-off date July 1, 2020.
Distribution date The 25th of each month, or the next business
day, beginning Aug. 25, 2020.
Stated maturity date April 25, 2065.
Certificate balance,including unratedclasses
$486,017,241 in aggregate.
Presale:
Starwood Mortgage Residential Trust 2020-3August 3, 2020
PRIMARY CREDIT ANALYST
Alicia Clarke
New York
(1) 212-438-8805
[email protected]
SECONDARY CONTACTS
Terry G Osterweil
New York
(1) 212-438-2567
[email protected]
G C Torres
San Francisco
(1) 415-371-5066
[email protected]
Diane Lebowitz
New York
+ 212-438-1524
[email protected]
SURVEILLANCE CREDIT ANALYST
Truc T Bui
San Francisco
(1) 415-371-5065
[email protected]
ANALYTICAL MANAGER
Vanessa Purwin
New York
+ 1 (212) 438 0455
[email protected]
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2489507
mailto: [email protected]:
[email protected]:
[email protected]:
[email protected]:
[email protected]:
[email protected]:
[email protected]:
[email protected]: [email protected]:
[email protected]: [email protected]:
[email protected]
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Profile (cont.)
Collateral type The aggregate pool comprises of 1,064 primarily
non-qualified mortgage loans, which are fixed-and adjustable-rate
residential mortgage loans (some with interest-only features)
secured by firstliens on single-family residences, planned unit
developments, condominiums, and two-four familyresidential
properties.
Credit enhancement For each class of rated certificates,
subordination in the form of certificates that are lower inpayment
priority, as well as excess spread that preserves
subordination.
ATR--Ability-to-repay.
Participants
Issuer Starwood Mortgage Residential Trust 2020-3.
Sponsor and servicing administrator Starwood Non-Agency Lending
LLC.
Seller SMRF TRS LLC.
Depositor SMRF Depositor LLC.
Trustee Wilmington Savings Fund Society FSB.
Custodian Deutsche Bank National Trust Co.
Master servicer and securities administrator Wells Fargo Bank
N.A.
Servicers AmWest Funding Corp. and Select Portfolio Servicing,
Inc.
R&Ws breach reviewers Opus Capital Markets Consultants LLC
and Clayton Services LLC.
Initial purchasers Credit Suisse Securities (USA) LLC.
R&Ws--Representations and warranties.
Originators Making Up More Than 10.0% Of The Collateral
Entity By balance (%) Due diligence (%) Originator ranking
AmWest Funding Corp. 66.7 100 Not ranked
LoanDepot.com LLC 14.3 100 Not ranked
Rationale
The preliminary ratings assigned to Starwood Mortgage
Residential Trust 2020-3's (STAR 2020-3)mortgage pass-through
certificates reflect our view of:
- The pool's collateral composition (see the Collateral Summary
section below);
- The credit enhancement provided for this transaction;
- The transaction's associated structural mechanics;
- The representation and warranty (R&W) framework for this
transaction;
- The geographic concentration; and
- The impact the COVID-19 pandemic will likely have on the
performance of the mortgageborrowers in the pool (see "Economic
Research: The U.S. Faces A Longer And Slower ClimbFrom The Bottom,"
published June 25, 2020) and liquidity available in the
transaction.
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2489507
Presale: Starwood Mortgage Residential Trust 2020-3
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S&P Global Ratings acknowledges a high degree of uncertainty
about the coronavirus pandemic.The consensus among health experts
is that the pandemic may now be at, or near, its peak insome
regions but will remain a threat until a vaccine or effective
treatment is widely available,which may not occur until the second
half of 2021. We are using this assumption in assessing theeconomic
and credit implications associated with the pandemic (see our
research here:www.spglobal.com/ratings). As the situation evolves,
we will update our assumptions andestimates accordingly.
Noteworthy Features
Acquisition process
Unlike prior STAR transactions, where the sponsor acquired the
mortgage loans through theirtypical loan aggregation business, in
STAR 2020-3, on the closing date, the sponsor will acquirethe loans
from DLJ Mortgage Capital Inc. AmWest Funding Corp. originated
66.7% of the pool byloan balance, with the remainder of the loans
originated by LoanDepot.com LLC (14.3%), RoyalBusiness Bank (6.1%),
and other originators (each representing less than 5.0%).
Because AmWest Funding Corp. originated greater than 20.00% of
the pool by balance, weconducted a transaction-specific mortgage
operational assessment (MOA) review on AmWest. Wereviewed
historical performance data on AmWest's originations, as well as
performance data forsecuritizations where AmWest was either a 100%
contributor (CSMC AFC deals) or a majoritycontributor (Arroyo
deals). We determined that prior to COVID-19, loan performance,
includingdelinquencies, losses, repurchases, early payment
defaults, modifications, etc., was similar to theperformance of
other non-qualified mortgage (non-QM) originators. As expected, due
to COVID-19,there was a significant jump in total delinquencies in
recent months. We applied a 1.05xtransaction-specific MOA
adjustment factor to the loans originated by AmWest Funding Corp.
Wealso determined that this adjustment factor was appropriate for
the remainder of the loans in thepool.
Loans in forbearance/deferment
On March 31, 2020, the Coronavirus Aid, Relief, and Economic
Security (CARES) Act enactedCOVID-19-related relief for borrowers
with government-backed mortgage loans in the form of atemporary
forbearance of up to 12 months of scheduled payments. While
non-agency loans do notfall under the CARES Act as it relates to
this forbearance, servicers have been grantingforbearance plans to
non-agency borrowers also, typically with some variations to those
of theCARES Act (e.g., timeframe, approval requirements, etc.). On
April 17, 2020, we updated ourmortgage outlook and corresponding
archetypal foreclosure frequency levels (see "Guidance:Methodology
And Assumptions For Rating U.S. RMBS Issued 2009 And Later,"
published April 17,2020) to account for a portion of the borrowers
entering COVID-19-related temporary forbearanceplans and their
impact to the overall credit quality of collateralized pools. To
the extent asecuritization pool exhibits growth levels in
forbearance over time beyond those otherwiseexpected, additional
adjustments may be applied.
To differentiate the credit quality of securitization pools with
varying percentages of loans invarious stages of forbearance or
deferment due to the outbreak of the COVID-19 at the time
ofissuance, we increased loss coverage levels to account for the
potential incremental risk. Givenour current expectations for
temporary forbearance or deferment plans and our market outlook,we
view the credit quality of a mortgagor on a forbearance or
deferment plan as weaker than one
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Presale: Starwood Mortgage Residential Trust 2020-3
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with a current loan but potentially stronger than one with a
30-day delinquent loan that exhibitspayment issues in a normal
macroeconomic environment. Our view considers the fact
thatforbearance or deferment may have been utilized by some
borrowers who could have otherwisemade the payment due, or the
forbearance may be related to a temporary furlough or loss
ofincome. The adjustment factors we apply to 30- and 60-day
delinquent loans are 2.5x and 5.0x,respectively.
As of July 10, 2020, 109 mortgage loans (approximately 12.1% of
the pool balance) have borrowerswho were granted forbearance of up
to three months, are in review for forbearance, received aprincipal
and interest (P&I) payment deferment, and/or received a loan
modification due to theoutbreak of the COVID-19 pandemic. Of these
109 loans, the borrowers for 15 mortgage loans(1.4% by pool
balance) opted out of their forbearance plans and either continued
to make fullmonthly payments prior to opting out of the plan or
repaid the forborne amounts in full and thenopted out of the plan.
For these 15 loans, we applied a forbearance-related adjustment
factor of1.00x-1.25x. For the remaining 94 loans (10.8% by pool
balance), which are either in under reviewfor assistance, in active
forbearance, received deferment, or received a modification due
toCOVID-19, we applied a forbearance-related adjustment factor of
1.75x-2.50x. This resulted in anoverall adjustment factor of 1.15x
at the pool level.
When deriving these factors, we considered aspects such as the
seasoning of the loans andforbearance plans, payment patterns of
those loans before and throughout the forbearance plan,the various
stages of forbearance/deferment (see table 1), and our general
expectations offorbearance/deferment from now until securitization
closing.
Table 1
Forbearance/Deferment Status
Forbearance/deferment status Loan count (no.) % by balance
Never received forbearance or deferment 955 87.9
Active forbearance - no deferment 79 8.6
Active deferment – no forbearance 6 0.9
Previously in forbearance - modified 4 0.8
Under forbearance review 5 0.5
Opted out of forbearance plan - repaid missed payments in full 8
0.8
We will continue to monitor the credit behavior related to
temporary forbearance as the situationevolves and more performance
information becomes available, and may adjust our loss
coveragelevels accordingly, which could affect the ratings. For
instance, if we were to change the pool-leveladjustment related to
the portion of the pool currently in forbearance to 1.35x (which is
more akinto our adjustment factors for a 60-day delinquent loan)
from 1.15x, ratings could, in some cases,be approximately two
notches lower. We will also continue to monitor macroeconomic and
housingconditions and update our mortgage market outlook and
associated archetypal foreclosurefrequencies as applicable.
AmWest as servicer
In this transaction, AmWest is the servicer for the AmWest
originated loans (66.7% of the pool).SPS is the servicer for the
remainder of the loans in the pool. This is a change from prior
STARdeals, wherein SPS was the servicer for all of the loans in the
transactions.
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Presale: Starwood Mortgage Residential Trust 2020-3
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Clayton as R&W breach reviewer
In this transaction, Clayton Services LLC is the R&W breach
reviewer for the loans where OpusCapital Markets Consultants
completed the third-party due diligence (15.1% of the pool). Opus
isthe R&W breach reviewer for the remainder of the loans in the
pool. This is a change from priorSTAR deals, wherein Opus was the
R&W breach reviewer for all of the loans in the
transactions.
Sequential-pay structure
Similar to many post-COVID nonprime RMBS transactions, STAR
2020-3 has a sequential paymentstructure. Principal and interest is
paid sequentially to each class, ensuring that the classesbenefit
from an effective subordinate floor that is not reduced at any
time.
Collateral Summary
The mortgage pool consists of 1,064 mortgage loans with a
principal balance of approximately$486.01 million as of the cut-off
date. The vast majority of the pool's loans have 30-year
originalterms to maturity, and the pool's weighted average
seasoning is approximately seven months fromthe origination date.
The assets consist of fixed-rate and adjustable-rate loans, some
withinterest-only features (seven or 10 years), primarily non-QM
loans secured by first liens onresidential properties (the mortgage
loans).
The collateral pool, from a credit perspective, is weaker than
the S&P Global Ratings archetypalprime pool, but is generally
in line with other nonprime residential mortgage pools. The loans
inSTAR 2020-3 have relatively low original combined loan-to-value
ratios (CLTVs) with a weightedaverage of 69.2% compared with other
nonprime pools that we have rated. The weighted averagecurrent
FICO, at 733, is also relatively strong. However, the pool is
concentrated in California(73.2% of the pool), and, in particular,
in the urban areas of Los Angeles (50.8%) and SanFrancisco (9.7%).
To account for this geographic concentration, we applied an
adjustment factorof 1.22x to our base loss coverage estimate.
The 'AAA' loss coverage requirement for the pool was determined
to be 24.35%. Certaincharacteristics of the mortgage loans that we
considered weaker than the archetypal pool in ouranalysis (see the
Strengths and Weaknesses section) include:
- Documentation type (alternative (bank statements) income and
business-purpose investorloans);
- Loan type (adjustable-rate mortgage loans and interest-only
features);
- Property type (two-four family homes and condominiums);
- Occupancy status (second home or investor property);
- Loan purpose (cash-out refinances);
- Self-employed borrowers for certain loans;
- A significant number of non-QM loans;
- Nonpermanent resident aliens or foreign national borrowers for
certain loans;
- Geographic concentration primarily in the Los Angeles area;
and
- Loans that have been granted temporary forbearance or
deferment due to the COVID-19
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Presale: Starwood Mortgage Residential Trust 2020-3
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pandemic.
Table 2
Collateral Characteristics
STAR2020-3
ARRW2020-1
STAR2020-1
CSMC2020-AFC1
CSMC2019-AFC1
Archetypalpool(i)
Closing pool balance (mil. $) 486.0 355.7 381.3 370.8 355.8
N/A
Closing loan count (no.) 1,064 899 605 822 739 N/A
Avg. loan balance ($) 456,783 395,684 630,213 451,110 481,526
N/A
WA original CLTV (%) 69.2 66.9 70.0 68.9 67.3 75.0
WA current CLTV (%) 68.4 65.9 69.6 68.6 66.9 75.0
WA FICO(ii) 733 742 734 736 739 725
WA current rate (%) 5.3 5.4 6.0 5.5 5.8 N/A
WA original term (mos.) 362 360 358 360 358 360
WA seasoning (mos.) 7 8 5 3 4 0-6
WA debt-to-income (%) 37.6 37.2 30.0 37.3 38.3 36.0
WA DSCR (non-zero) 1.20 1.18 N/A N/A N/A N/A
Owner occupied (%) 61.5 68.1 70.3 66.0 73.3 100.0
Single-family (including unattachedand attached PUD) (%)
80.5 81.2 83.6 88.6 87.4 100.0
Adjustable-rate loans (%) 55.8 72.9 61.4 66.4 83.5 0.0
Loans with IO payments (%) 5.9 3.1 23.5 3.0 5.5 0.0
Purchase (%) 62.0 71.2 48.8 69.0 58.5 100.0
Cash-out refinancing (%) 26.2 23.0 36.9 21.5 32.2 0.0
Full documentation (%) 42.1 58.1 11.2 48.5 38.7 100.0
Alternative/bank statementdocumentation (%)
34.5 38.2 82.0 49.0 59.6 0.0
Other/asset depletion/DSCRdocumentation (%)
23.4 3.8 6.8 2.5 1.7 0.0
Self-employed borrowers (%) 42.7 39.5 87.9 49.6 61.6 0.0
Loans with co-borrowers (%) (iii) 21.1 10.9 29.0 15.3 14.1
0.0
Loans to borrowers with multiplemortgages (%)(iv)
6.9 1.0 7.5 0.1 0.0 N/A
Loans to foreign borrowers(%)(foreign national andnon-permanent
resident aliens)
7.6 5.1 0.4 7.2 11.2 0.0
Modified loans (%)(v) 0.8 0.0 0.0 0.0 0.0 0.0
PCEs (%)(v) 0.2 0.0 0.1 0.0 0.0 0.0
Current (%)(vi) 100.0 99.4 100.0 100.0 100.0 100.0
30+ day delinquent (%) 0.0 0.6 0.0 0.0 0.0
Length of P&I advancing (mos.)(vii) 6 6 6 6 6 Full
Pool-level adjustments (multiplicative factors)
Geographic concentration 1.22 1.19 1.10 1.30 1.17 1.00
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Presale: Starwood Mortgage Residential Trust 2020-3
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Table 2
Collateral Characteristics (cont.)
STAR2020-3
ARRW2020-1
STAR2020-1
CSMC2020-AFC1
CSMC2019-AFC1
Archetypalpool(i)
Mortgage operationalassessment
1.05 1.03 1.00 1.05 1.05 1.00
Representations and warranties 1.10 1.10 1.10 1.10 1.10 1.00
Other (i.e. loanmodification/PCE/due diligence)
1.00 1.00 1.00 1.00 1.00 1.00
Loans in forbearance/deferredpayments related to COVID-19
1.15 1.15 N/A N/A N/A
Combined pool-leveladjustments(viii)
1.62 1.55 1.21 1.50 1.35 1.00
Loss estimation(ix)
'AAA' loss coverage (%) 24.35 15.90 22.05 18.35 16.05 7.50
'AAA' foreclosure frequency (%) 45.84 32.54 43.33 35.38 33.77
15.00
'AAA' loss severity (%) 53.12 48.86 50.89 51.87 47.53 50.00
'BBB' loss coverage (%) 7.65 4.45 6.75 5.10 4.20 1.50
'BBB' foreclosure frequency (%) 24.96 17.11 22.01 17.06 16.31
5.00
'BBB' loss severity (%) 30.65 26.01 30.67 29.89 25.75 30.00
'B' loss coverage (%) 2.25 1.25 1.65 1.25 1.00 0.65
'B' foreclosure frequency (%) 10.57 7.17 7.52 5.96 5.65 3.25
'B' loss severity (%) 21.29 17.43 21.94 20.97 17.70 20.00
(i)As defined in our Feb. 22, 2018, criteria article. (ii)FICO
reflects the most recent scores obtained with certain analytical
assumptions.(iii)Limited to loans where certain characteristics
were provided for multiple borrowers. (iv)Limited to borrowers who
have multiple mortgageloans or properties included in the
securitized pool. (v)Limited to modified and PCE loans considered
in our analysis. (vi)Loans in forbearanceare treated as current and
included in the model forbearance adjustment. (vii)Months of
P&I advancing on a delinquent mortgage loan to theextent such
advances are deemed recoverable. (viii)Combined pool-level
adjustments are the product of each pool-level adjustment
listedabove. (ix)The guidance document published April 17, 2020,
reflects a revision to our 'B' (base case) projected foreclosure
frequencyassumption for an archetypal loan to 3.25% from 2.50%.
Loss estimates for STAR 2020-1, CSMC 2020-AFC1, and CSMC 2019-AFC1
do notreflect updated base case scenario.WA--Weighted average.
CLTV--Combined loan-to-value ratio. DSCR--debt service coverage
ratio.PUD--planned-unit development. IO--Interest-only. PCE--Prior
credit event. P&I--Principal and interest. N/A--Not
applicable.
The weighted average FICO score for the collateral pool is 733,
based on certain S&P GlobalRatings assumptions. (See table 1
for a breakdown of the pool by the borrowers' FICO scores.)There
are 119 loans to nonpermanent resident aliens (NPRAs) or foreign
borrowers (7.61% bybalance) in this pool. In addition, out of these
119 loans, 86 loans lacked a FICO score. Weassigned a score of 697
to such borrowers with missing FICOs, which is the non-zero average
FICOof the pool, minus one standard deviation. Assuming that the
underlying borrower profile isrelatively homogenous, we believe
this assumption appropriately addresses the risk of borrowersin
this pool without FICO scores.
Table 3
Updated Credit Score Statistics
FICO score(i) Current balance (%)
800+ 4.8
775-799 19.3
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Presale: Starwood Mortgage Residential Trust 2020-3
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Table 3
Updated Credit Score Statistics (cont.)
FICO score(i) Current balance (%)
750-774 18.5
725-749 16.3
700-724 14.1
675-699 16.8
650-674 5.1
625-649 3.1
600-624 0.9
575-599 0.5
550-574 0.4
525-549 0.0
500–524 0.0
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Chart 1
The transaction is structured as a double true sale of the
underlying receivables from the seller(SMRF TRS LLC) to the
depositor (SMRF Depositor LLC), and from the depositor to the
issuingtrust. The issuing trust transfers the newly issued
certificates to the depositor. The depositor sellsthem to the
initial purchasers, who sell them to third-party investors. The
depositor also sells thenon-offered certificates, as well as those
required to be held to satisfy the risk-retention rules, toan
affiliate of the sponsor.
In rating this transaction, S&P Global Ratings will review
the legal matters that it believes arerelevant to its analysis, as
outlined in its criteria.
Strengths And Weaknesses
We believe the following characteristics and features strengthen
the transaction:
- The mortgage pool generally consists of loans to borrowers
with strong credit scores andsignificant home equity as evidenced
by the pool's weighted average FICO of 733 and weightedaverage
original CLTV ratio of 69.2%.
- Third-party due diligence providers included on our published
list of reviewed due diligenceproviders performed due diligence on
100% of the collateral pool. The review encompassed
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credit (underwriting) review, property valuation, regulatory
compliance, and data integrity.
- Approximately 21.1% of the loans by balance have more than one
borrower, which reduces therisk of default. We applied a 0.75x
adjustment factor to our loss estimates for these loans.
- This transaction has a sequential payment structure. Principal
and interest is paid sequentiallyto each class, ensuring that the
classes benefit from an effective subordinate floor that is
notreduced at any time.
- Excess monthly collections are available as credit enhancement
to cover any interest shortfallsand to pay principal on the classes
up to the applied realized loss amounts for the month, andthen for
any cumulative realized loss amounts to date. Any remaining amounts
are used toreimburse previously written-down classes sequentially
to the extent the applicable principalbalance for such class of
certificates has not been increased by prior applications of
certificatewrite-up amounts.
We believe the following factors weaken the transaction:
- As of July 10, 2020, 109 mortgage loans, (approximately 12.1%
of the pool balance) haveborrowers who were granted forbearance of
up to three months, are in review for forbearance,received a
P&I payment deferment, and/or received a loan modification due
to the outbreak ofthe COVID-19 pandemic. We applied a
forbearance-related adjustment factor of 1.15x at thepool level to
account for this risk.
- Income on certain mortgage loans (34.5% by balance) was
verified using "alternative" incomesources, including personal or
business bank statements and third-party prepared profit andloss
(P&L) statements. The majority of such loans had 12 months of
income verification. Inaddition, income on 23.4% of the loans are
coded as "other" documentation, such as debtservice coverage ratio
(DSCR) or asset depletion. We view income verification
using"alternative" and "other" documentation methods to be a weaker
standard than "full"documentation of income, and, consequently, we
increased our loss coverages for these loansby applying an
adjustment to the foreclosure frequencies. We applied an adjustment
factor of1.75x-2.25x to the foreclosure frequencies for loans using
"alternative" income verification. Forthe "other" documentation
loans, we applied an adjustment factor of 3.00x-6.00x to
theforeclosure frequencies accordingly.
- Non-QM loans, which have an increased risk of ability-to-repay
(ATR) challenges andassociated losses, make up approximately 59.2%
of the pool. We applied an adjustment to lossseverities per our
criteria to account for this risk.
- Approximately 42.7% of the loans in the pool were made to
self-employed borrowers. Weapplied a 1.10x adjustment factor to our
loss estimates for these loans, which amounted to a1.04x adjustment
factor on the overall pool.
- The loans in this pool are geographically concentrated in
California (73.2% of the pool balance).The top five core-based
statistical areas (CBSAs) are located in the urban areas of Los
Angelesand San Francisco and account for 60.5% of the aggregate
pool balance. Because of thisgeographic concentration, we applied
an adjustment factor of 1.22x to our base loss
coverageestimate.
- The seller is providing R&Ws for this transaction that are
consistent with the set ofrepresentations published in our
criteria. The sponsor is providing a backstop to this
obligation.However, we view the R&W framework to be weak for
various reasons, including that the reviewmechanism does not
require an automatic review of all loans and the seller and/or
sponsor maybe unable to cure or repurchase. The third-party due
diligence review on 100% of the loans
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Presale: Starwood Mortgage Residential Trust 2020-3
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somewhat mitigates the weaknesses of the framework.
Consequently, we applied an R&Wadjustment that increased our
loss expectations at all rating categories by a 1.10x factor.
Credit Analysis and Assumptions
Our analysis of the STAR 2020-3 collateral pool considered a
number of factors, including certainloan-level characteristics.
Documentation type
The underlying originator's guidelines generally allow income
verification using paystubs,W-2s/W-2 equivalents, tax returns,
written verifications of employment documenting income,certified
public accountant (CPA) or third-party prepared P&L statements,
personal or businessstatements, asset depletion, investor-property
rental income, or a combination thereof. Table 3shows the breakdown
of the documentation types used in our analysis by balance and
thecorresponding foreclosure frequency adjustment factors per our
criteria.
Table 4
Documentation Type (Income Verification Type/Length)
Loancount
(no.)Current
balance (%)
Alternative incomeverification length(WA no. of months)
Foreclosurefrequency
adjustment factors(x)
'AAA' foreclosurefrequency without
pool adjustmentfactors (%)
Full documentation
Appendix Q/qualifiedmortgage
38 7.5 - 1.00 23.2
Full (24+ months) 45 7.3 - 1.00 18.4
Full (24+ months)WVOE only
279 25.9 - 1.25 19.9
Full (12-23 months) 6 0.8 - 1.25 31.2
Full (12-23 months)WVOE only
7 0.6 - 1.25 15.6
Full (1-11 months) - - - 1.50 -
Full (1-11 months)WVOE only
- - - 1.50 -
Alternative documentation
24+ months (primary source)
Business bankstatements
8 1.6 24.0 1.75 53.5
Personal bankstatements
5 0.6 24.0 1.75 30.1
Personal or businessbank statements(ii)
29 2.5 24.0 1.75 41.9
P&L statements(i) 6 0.6 24.0 1.75 57.8
Additional alternative(CPA letter/FN)
- - - 1.75 -
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Table 4
Documentation Type (Income Verification Type/Length) (cont.)
Loancount
(no.)Current
balance (%)
Alternative incomeverification length(WA no. of months)
Foreclosurefrequency
adjustment factors(x)
'AAA' foreclosurefrequency without
pool adjustmentfactors (%)
12-23 months (primary source)
Business bankstatements
31 4.2 12.0 2.00 44.8
Personal bankstatements
7 0.6 12.0 2.00 41.3
Personal or businessbank statements(ii)
- - - 2.00 -
P&L statements(i) 171 20.3 12.0 2.00 41.6
Additional alternative(CPA letter/FN)
- - - 2.00 -
1-11 months (primary source)
Business bankstatements
- - - 2.25 -
Personal bankstatements
1 0.1 2.0 2.25 46.3
P&L statements(i) 31 4.0 8.5 2.25 20.9
Additional alternative(CPA letter/FN)
- - - 2.25 -
Other documentation
Other (DSCR) 393 22.5 - 3.15-6.00 58.5
Other (applied 0.00DSCR)
- - - 6.00 -
Other (assetdepletion)
7 0.9 - 3.00 43.8
(i)The documentation source may include other secondary
documentation types such as a CPA letter or supporting bank
statements.(ii)Account type not provided. WVOE--Written
verification of employment/employer letter. WA--Weighted average.
P&L--Profit and loss.FN--Foreign National program. DSCR--Debt
service coverage ratio.
QM and ATR standards
The Consumer Financial Protection Bureau issued final
regulations for mortgage loans withapplications submitted on or
after Jan. 10, 2014, specifying the standards for a QM (see table 5
fora QM breakout).
Table 5
QM Breakout
QM status Pool balance ($) % by pool balance
QM/Non-HPML (safe harbor) 33,193,610 6.8
QM/HPML (rebuttable presumption) 3,583,519 0.7
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Table 5
QM Breakout (cont.)
QM status Pool balance ($) % by pool balance
Non-QM/ATR compliant(i) 287,918,322 59.2
Not covered/exempt 161,321,790 33.2
Total 486,017,241 100.0
(i)Includes 45 loans originated by a Community Development
Financial Institution (CDFI)—Royal Business Bank, which are not
covered/exemptby nature, but were coded as non-QM/ATR compliant by
the sponsor and third-party due diligence firm. QM--Qualified
mortgage.HPML--Higher-priced mortgage loan. ATR--Ability to
repay.
Under the ATR rule (as more fully described in our criteria--see
Appendix I of "Methodology AndAssumptions For Rating U.S. RMBS
Issued 2009 And Later," Feb. 22, 2018), the originator and
anyassignee are jointly and severally liable for certain damages
that may be incurred fromnoncompliance with the rule. For each of
the loans in the pool subject to the rule, we applied ourcriteria
and determined that additional credit enhancement was needed at all
rating categories.
Servicer advancing obligations
Including loans in forbearance/deferment, the servicer must
advance delinquent P&I on anydelinquent mortgage loan until the
loan is either greater than 180 days delinquent (limited
P&Iadvancing/stop-advance loan) or such P&I advance is
deemed unrecoverable. In the event that theservicer fails to
advance P&I on any loan that is not a stop-advance loan,
including loans inforbearance/deferment, then the master servicer
(Wells Fargo Bank N.A.) is responsible formaking those
advances.
Unlike P&I advances, the servicer must always advance
delinquent taxes and insurance (and otherproperty preservation
advances) until the related property is liquidated or the servicer
deems theadvance to be unrecoverable. We incorporated the limited
P&I advancing into our loss severities.
Borrowers with multiple loans
We did not make any additional adjustments to the loss coverage
or tail risk analysis due toborrowers with multiple loans in the
pool because only 40 borrowers (6.9% of the pool balance)have
multiple loans in the pool. These borrowers have two-to-five loans
each. The highestexposure to any one borrower amounts to 4.2% of
the pool balance.
Structural Features
Similar to many post-COVID-19 nonprime RMBS transactions, STAR
2020-3 has a sequentialpayment structure. Principal and interest is
paid sequentially to each class, ensuring that theclasses benefit
from an effective subordinate floor that is not reduced at any
time.
The securities administrator will make monthly distributions of
interest from the interestremittances and will make monthly
distributions of principal from principal remittances (seetables 6,
7, and 8).
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Table 6
Interest Payment Waterfall
Priority Payment
1 Interest and interest carryforwardamounts sequentially to the
class A-1,A-2, A-3, M-1, B-1, B-2, and B-3certificates.
2 Any remaining amounts paid as part ofmonthly excess
cashflow.
(i)Interest carryforward amounts are deferred interest payments
that accrueinterest at the lower of the respective fixed coupon and
the net WAC rate. Ourpreliminary ratings address the full payment
of all interest and interestcarryforward amounts by the final
maturity date. WAC--Weighted averagecoupon.
Table 7
Principal Payment Waterfall
Priority Payment
1 Interest and interest carryforward amounts to the class A-1
certificates.
2 Principal to the class A-1 certificates until reduced to
zero.
3 Interest and interest carryforward amounts to the class A-2
certificates.
4 Principal to the class A-2 certificates until reduced to
zero.
5 Interest and interest carryforward amounts to the class A-3
certificates.
6 Principal to the class A-3 certificates until reduced to
zero.
7 Interest and interest carryforward amounts to the class M-1
certificates.
8 Principal to the class M-1 certificates until reduced to
zero.
9 Interest and interest carryforward amounts to the class B-1
certificates.
10 Principal to the class B-1 certificates until reduced to
zero.
11 Interest and interest carryforward amounts to the class B-2
certificates.
12 Principal to the class B-2 certificates until reduced to
zero.
13 Interest and interest carryforward amounts to the class B-3
certificates.
14 Principal to the class B-3 certificates until reduced to
zero.
15 Any remaining amounts paid as part of monthly excess cash
flows.
Table 8
Monthly Excess Cash Flow Waterfall
Priority Payment
1 In an amount up to the amount of any realized losses for such
distribution date, sequentially to the classA-1, A-2, A-3, M-1,
B-1, B-2, and B-3 certificates, in reduction of the class principal
balance thereof, untilthe certificate amount of each class is
reduced to zero.
2 In an amount up to the amount of any cumulative applied
realized loss amounts, sequentially to the classA-1, A-2, A-3, M-1,
B-1, B-2, and B-3 certificates, in reduction of the class principal
balance thereof, untilthe certificate amount of each class is
reduced to zero; and then sequentially to the class A-1, A-2,
A-3,M-1, B-1, B-2, and B-3 certificates, to reimburse such classes
for applied realized loss amountspreviously allocated thereto.
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Table 8
Monthly Excess Cash Flow Waterfall (cont.)
Priority Payment
3 From amounts otherwise distributable to the class XS
certificates, to the cap carryover reserve account,up to the
aggregate cap carryover amount for the class A-1, A-2, A-3, M-1,
B-1, and B-2 certificates.
4 From amounts on deposit in the cap carryover reserve account,
sequentially to the class A-1, A-2, A-3,M-1, B-1, and B-2
certificates, any unpaid cap carryover amounts thereon.
5 To the class XS certificates as distributions of excess
interest as outlined in the pooling and servicingagreement.
6 To the trustee, the custodian, the securities administrator,
the master servicer, the reviewers, and theservicing administrator,
pro rata, any extraordinary trust expenses remaining unpaid after
application ofthe annual expense cap and the applicable subcap
amount.
7 To the class A-R certificates, any remaining amounts.
(i)The cap carryover amount is the positive difference between
the interest that would have accrued at the fixed coupon rate
(without regard tothe net WAC rate) and what was actually due based
upon the net WAC rate. Any prior unpaid cap carryover amounts also
accrue at the fixed rate.Our preliminary ratings do not address the
payment of cap carryover amounts. WAC--Weighted average coupon.
The interest remittance amount includes interest the servicers
collect from the borrowers,interest advanced, the interest portion
of liquidation proceeds net of Servicers' or MasterServicers
expenses, the interest portion of subsequent recoveries, and the
interest portion of anyRepurchase price less aggregate expense fees
(which include servicing fees adjusted to reduceany prepayment
interest shortfalls, master servicing fees, trustee fees, custodial
fees, reviewerfees) and non-recoverable advances, other
reimbursements allowed under the servicingagreement,
expenses/fees/indemnification amounts payable to transaction
parties.
Principal remittance amounts include scheduled principal
payments (excluding any Cut-off DateForbearance Amounts and any
Cut-off Date Deferred Amounts), together with principal
advances,unscheduled principal, the principal portion of
liquidation proceeds net of the Servicers' or MasterServicers
expenses, the principal portion of subsequent recoveries and
make-whole payments,the principal portion of any Repurchase price
or substitution amount, or substitution adjustmentpayments less
certain fees to the extent not paid from interest collections and
subject to certainannual caps certain other expenses and
indemnities.
The certificate interest rate for each of the class A-1, A-2,
A-3, M-1, B-1, and B-2 certificates willbe a per annum rate equal
to the lesser of: (a) the fixed rate for such class of certificates
and (b)the net weighted average coupon (WAC) rate. The net WAC rate
is defined as the weighted averageof the mortgage interest rates of
the loans net of fees, the gross servicing strip amount,
andextraordinary trust expenses weighted based on the loans'
principal balances. In line with ourimputed promises criteria, our
preliminary ratings address the lower of these two rates
(see"Principles For Rating Debt Issues Based On Imputed Promises,"
Dec. 19, 2014, and theassociated guidance document "Guidance:
Principles For Rating Debt Issues Based On ImputedPromises," July
26, 2019).
Under the transaction documents, the issuer can defer interest
payments on these certificates. Afailure to pay the interest
amounts due on the certificates will result in the deferred
interest(interest carryforward amounts) accruing interest at the
lower of the fixed rate and the net WACrate for all classes. Our
preliminary ratings on the classes address the P&I payments
(includinginterest carryforward amounts) by the certificates' final
maturity date.
Our preliminary ratings, however, do not address the payment of
the cap carryover amounts (i.e.,the difference between the coupon
and the net WAC cap where the coupon exceeds the net WAC
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cap). These amounts are subordinated in the payment priority. In
our view, neither the initialcoupons on the certificates nor the
initial net WAC rates are de minimis, and nonpayment of thecap
carryover amounts is not considered an event of default under the
transaction documents.Therefore, we do not need to consider whether
these cap carryover amounts are paid in our cashflow analysis, in
line with our criteria for imputed promises.
All classes are paid principal sequentially. Unlike the credit
enhancement seen in shifting-interestRMBS structures, which may
deplete due to scheduled and prepaid principal paid to
thesubordinate classes, the credit enhancement provided by each
class in a subordinate position inthis transaction does not deplete
because no principal payments are made to any these classunless it
is the most senior class outstanding. Although there is no specific
credit enhancementfloor, because principal is paid sequentially
among the classes we believe any tail riskconsiderations are
accounted for.
If the aggregate class balance of the certificates exceeds the
pool balance, the resulting excess(the applied realized loss
amount) is applied reverse sequentially to the B-3, B-2, B-1, M-1,
A-3,A-2, and A-1 certificates until each class' principal balance
has been reduced to zero.
If the pool balance exceeds the aggregate class balance of the
certificates (after the allocation ofprincipal payments and monthly
excess cash flows to pay down the certificates), the balances ofthe
certificates will be "written up" to the aggregate amount of
applied realized lossessequentially to the class A-1, A-2, A-3,
M-1, B-1, B-2, and B-3 certificates.
Geographic Concentration
S&P Global Ratings analyzes the pool's geographic
concentration risk based on theconcentrations of loans in each of
the CBSAs defined by the U.S. Office of Management andBudget (see
Appendix II of "Methodology And Assumptions For Rating U.S. RMBS
Issued 2009 AndLater," Feb. 22, 2018). In this transaction, the top
five CBSAs are located in the urban areas of LosAngeles and San
Francisco and account for 60.5% of the aggregate pool balance.
Because of thisgeographic concentration, we applied a Herfindahl
adjustment factor (a concentration measurebased on the sum of the
squared CBSA concentrations related to a benchmark concentration)
of1.22x to our base loss coverage estimate. Moreover, in our
analysis, we adjust the loss severitieson loans for the level of
over/under valuation in the property market by comparing the
long-termaverage of the ratio of house prices to income to the
current values of the same.
Table 9
Geographic Concentration
CBSA code(i) CBSA State % by balance
31084 Los Angeles-Long Beach-Glendale, CA Calif. 34.9
11244 Anaheim-Santa Ana-Irvine, CA Calif. 9.4
40140 Riverside-San Bernardino-Ontario, CA Calif. 6.5
36084 Oakland-Berkeley-Livermore, CA Calif. 4.9
41884 San Francisco-San Mateo-Redwood City, CA Calif. 4.8
Top 5 60.5
(i)CBSA code refers to the metropolitan division code, if
available. CBSA--Core-based statistical area (includes metropolitan
statistical areasand metropolitan divisions where defined, as well
as micropolitan statistical areas).
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Large Loans And Tail Risk Considerations
As the number of loans in the transaction decreases, the effect
of a single loan's losses becomesgreater. If conditional prepayment
rates are slow and collateral pool losses are not realized
untillater in a transaction's life (back-loaded losses), pro rata
pay mechanisms can then leave thesenior notes exposed to event risk
later in the transaction's life. To mitigate this risk,
thetransaction documents for a pro-rata structure may provide for a
credit enhancement floor,specifying principal payments not be made
to subordinate classes if the credit support availableto the senior
classes falls below a threshold. However, this deal utilizes a
sequential pay structuretherefore each class effectively has a
floor equal to all of the classes subordinate to that
class.Therefore any large loan risk and tail risk is mitigated.
Mortgage Operational Assessment (MOA)
Unlike prior STAR transactions, where the sponsor acquired the
mortgage loans through theirtypical loan aggregation business, in
STAR 2020-3, on the closing date of this transaction, thesponsor
will acquire the loans from DLJ Mortgage Capital Inc. AmWest
Funding Corp. originated66.7% of the pool by loan balance, with the
remainder of the loans originated by LoanDepot.comLLC (14.3%),
Royal Business Bank (6.1%), and other originators (each
representing less than5.0%).
Because AmWest Funding Corp. originated greater than 20.00% of
the pool by balance, weconducted a transaction-specific MOA review
on AmWest. We reviewed historical performancedata on AmWest's
originations, as well as performance data for securitizations where
AmWestwas either a 100% contributor (CSMC AFC deals) or a majority
contributor (Arroyo deals). Wedetermined that prior to COVID-19,
loan performance, including delinquencies, losses,repurchases,
early payment defaults, modifications, etc., was similar to the
performance of othernon-QM originators. As expected, due to
COVID-19, there was a significant jump in totaldelinquencies in
recent months. We applied a 1.05x transaction-specific MOA
adjustment factorto the loans originated by AmWest Funding Corp. We
also determined that this adjustment factorwas appropriate for the
remainder of the loans in the pool (32.3% by balance).
Third-Party Due Diligence Review
The third-party due diligence providers--AMC Diligence LLC,
Clayton Services LLC, Digital Risk,Selene New Diligence Advisors,
and Opus Capital Markets Consultants LLC, which are all on ourlist
of reviewed providers--performed due diligence on 100% of the
pool's loans. Their reviewsencompassed credit (underwriting)
compliance, property valuations, regulatory compliance, anddata
quality. For loans that were underwritten to a DSCR, AMC Diligence
LLC did not review theloan for regulatory compliance. Some loans
fell within the scope of the TILA-Real EstateSettlement Procedures
Act (RESPA) Integrated Disclosure rule (TRID). For these loans,
thethird-party firms followed the SFIG RMBS 3.0 TRID Compliance
Review Scope in conducting theirfinal loan reviews (see "Standard
& Poor's Comfortable With SFIG Draft Proposal Regarding TRIDDue
Diligence," published April 25, 2016). According to our published
third-party due diligencecriteria, we adjust our loss expectations
based on our view of the firms' findings (see Appendix IIIof
"Methodology And Assumptions For Rating U.S. RMBS Issued 2009 And
Later," published Feb.22, 2018). After reviewing the third-party
due diligence results, we applied a neutral adjustment of1.00x to
the loss coverage.
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R&Ws
Our review of the R&Ws focused on whether the
representations made by an originator or theseller were
substantially consistent with the set of representations we
published as part of ourcriteria (see Appendix IV of "Methodology
And Assumptions For Rating U.S. RMBS Issued 2009 AndLater,"
published Feb. 22, 2018). Our review of the R&W framework
accounts for automatic reviewtriggers, knowledge qualifiers, gap
periods, sunset provisions, and enforcement mechanisms. Weevaluated
the strength of the R&W framework and considered whether any
breach could have amaterially adverse impact on the interests of
the transaction's certificateholders. If the R&Ws andthe
framework do not address the components in our published R&W
framework, we determinewhether it is appropriate to assess
additional credit enhancement. Lastly, we considered the
R&Wprovider's ability to fulfill its obligations in the event
of a breach.
On the closing date, the sponsor will acquire the mortgage loans
in this transaction from DLJMortgage Capital Inc. (DLJ). The
sponsor will then sell the loans to the seller, who will make
theR&Ws to the trust via applicable deal documents. The seller
has made the R&Ws either as of theorigination date of the loan
or as of the date the loans are sold to the issuing trust,
whichever isapplicable. The seller's performance of its obligations
regarding these R&Ws will be guaranteed bythe sponsor.
While the R&W framework is consistent with other R&W
frameworks utilized in comparable ratednonprime transactions, we
consider it to be weak because the controlling holder is not
required totest for loans that are severely delinquent or suffer a
realized loss (other than any loans showinglosses in which the
borrowers assert an ATR defense), though it has the option to do
so. However,if a loan is judicially determined to have a TRID
finding, or if the custodian determines a loan hasdefective or
missing documentation, it must be cured or repurchased. Another
positive feature ofthis transaction is that it allows a review of a
stop-advance mortgage loan (a severely delinquentloan on which the
servicer has stopped advancing P&I).
The R&Ws are generally consistent with our published
criteria for U.S. RMBS issued 2009 andlater, and they will remain
in effect for the transaction's life. However, given that the
statute oflimitations under New York law for R&W claims is
generally six years from the date arepresentation is made, there is
effectively an expiration date on the R&Ws. In addition, while
theEPD covenant is generally consistent with that in other rated
nonprime transactions, it is weakerthan what is described as the
standard in our criteria.
Because the R&W provider may have limited repurchasing
ability, we applied a 1.10x loss coverageadjustment to compensate
for the risk associated with the financial capacities of the
R&Wprovider and the overall R&W framework. We believe this
adjustment is appropriate in the contextof the due diligence
performed on the loans and the collateral's credit quality.
Attributes of the R&W framework
Knowledge qualifiers: The transaction has a knowledge qualifier
that relates to therepresentation that the property is in
compliance with environmental laws. Overall, this oneknowledge
qualifier does not appear to be material to the R&W
framework.
Sunset: The R&Ws do not contain sunset provisions.
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Review triggers: Review triggers occur if a loan incurs a
realized loss or is a severely delinquentloan, only if the
controlling holder directs the reviewer to test for R&W
breaches--except loans forwhich the borrowers assert an ATR
defense. Loans with realized losses for which borrowers assertan
ATR defense are automatically reviewed. A review on a loan with
realized losses can also betriggered with the approval of at least
25% of the certificateholders (the "directingcertificateholders").
In addition, if a loan is judicially determined to have a TRID
finding andstatutory damages exceed $400, or if the custodian
determines a loan has defective or missingdocumentation, it may be
cured by repurchasing, substitution, or by making a
make-wholepayment (negotiated between the R&W enforcer and the
representing party) to the trust. Overall,we believe these review
triggers are weaker compared to those typically seen in
prime-jumboRMBS transactions, but they are in line with, or
slightly better than, the ones stipulated in non-QMRMBS
transactions.
The breach reviewer: In this transaction, Clayton Services LLC
is the independent R&W breachreviewer for the loans where Opus
Capital Markets Consultants completed the third-party duediligence
(15.1% of the pool). Opus is the independent R&W breach
reviewer for the remainder ofthe loans in the pool. The reviewers
will have sole authority to determine whether a breach hasoccurred.
Having an independent breach reviewer is a positive feature of the
R&W framework, inour view.
Breach effectiveness: To determine whether a breach warrants a
repurchase obligation, theapplicable breach reviewer must follow
the prescribed guidelines detailed in the offeringmaterials. One
feature concerns a materiality test failure in which the breach
reviewer mustdetermine whether the defect materially increased the
loan's credit risk at origination; resulted in,or will result in, a
higher loss at liquidation; or impaired the payment or loan's
enforceability. Thereviewer must consider disclosure of any
defects, exceptions, compensating factors, and whetherthe mortgage
loan exception was in compliance with the underwriting guidelines
to determinemateriality.
The breach tests are prescribed, which has pros and cons.
Although it reduces the process'uncertainty to the representation
providers and investors, the specific procedures and thresholdsmay
limit the scope of the breach reviewer and could prevent certain
loans from being put back.
Enforcement party: Generally, the controlling holder will be the
R&W enforcement party. Whilethe risk-retention requirements are
still applicable, the risk-retention holder (initially, an
affiliateof the sponsor) will be the controlling holder. However,
if the seller's affiliate is the controllingholder and is the
breaching party, the trustee, at the request of directing
certificateholders, will bethe R&W enforcement party. After the
expiration of the risk-retention requirements, the majorityowner of
the junior-most subordinate (or mezzanine) tranche will typically
be the controllingholder. Due to the strategic business alliances
between the initial controlling holder and therepresenting party,
there is potential for conflicts of interest to arise between
thecertificateholders and the controlling holder related to calling
for an R&W breach review, as wellas for enforcing the R&W
breach cures. Stipulating approval from directing
certificateholdersbefore a trustee can act as a controlling holder
weakens the framework too, because it createsadditional steps that
would be needed to address enforcement.
Enforcement mechanisms: Enforcing the breach reviewer's decision
is not automatic after amaterial test failure is communicated via
initial review determination and the sponsor and trusteereceive
breach determination reports. Generally, within 30 days of
receiving the breachdetermination report, the R&W enforcement
party has to produce an enforcement initiation report
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and commence enforcement. Failure to do so will preclude any
further enforcement action. Thebreach cure period is 60 days from
receiving the enforcement initiation report, during which
therepresenting party can provide additional information or
documentation. The reviewer has another30 days to re-perform all
tests and produce a final review determination report. If the
representingparty provides no additional information, the initial
review determination report serves as the finalreview determination
report. If additional information is provided, but a final review
determinationreport is not delivered, a test failure will be deemed
to not have occurred. While these permissibletimeframes could
benefit the trust by potentially reducing the time it takes to put
back a loan, itcould also be a detriment because certain
technicalities related to missing strict timeframescould result in
not enforcing material breaches. Similarly, while requiring
directingcertificateholders approval for enforcement expenses in
excess of the annual enforcement capamount may give
certificateholders a choice of whether to pursue enforcement and
thus reducecosts, it may also delay enforcement. If the
representation provider disputes the final reviewdetermination, it
may choose arbitration proceedings.
Arbitration: Dispute resolutions are subject to arbitration
proceedings. Only the R&Wenforcement party or the representing
party may seek arbitration; the certificateholders are notpermitted
to participate in the arbitration proceedings. For successful
repurchase claims,reasonably incurred costs and expenses related to
the breach enforcement framework will beincorporated into the
repurchase price. For unsuccessful repurchase claims, reasonably
incurredcosts and expenses will be borne to the trust in the form
of extraordinary trust expenses subject tothe annual cap. The
decision of the arbitrator will be final and binding.
Cash Flow And Scenario Analysis
We reviewed the transaction structure and performed a cash flow
analysis to simulate variousrating stress scenarios (see table 10)
to determine the ratings for each class consistent with
ourcriteria, accounting for the available credit enhancement. We
analyzed various scenarios for eachrating category/level, including
combinations of:
- Front- and back-loaded default timing curves;
- Two-year recovery lag assumptions;
- Fast and slow prepayment assumptions;
- High, low, and forward interest rate curve assumptions;
and
- Delinquency assumptions to stress liquidity for potential
forbearance.
Table 10
Cash Flow Assumptions
Scenario
AAA AA A BBB BB B
Recovery lag (mos.) 24 24 24 24 24 24
Prepayments (%)(i)
Low CPR 1 2 3 4 5 6
High CPR 20 20 20 20 20 20
Servicer stop advance (%) N/A N/A N/A N/A N/A N/A
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Table 10
Cash Flow Assumptions (cont.)
Scenario
AAA AA A BBB BB B
Scenario 1: delinquency curve, standard delinquency curve for
testing triggers without cash flow stress
Scenario 2: delinquency curve; delinquencies at 35% for first
the six months to stress liquidity and triggers, followed
bystandard delinquency curve to test triggers
Foreclosure frequency (%) 45.84 40.30 32.54 24.96 17.68
10.57
Loss severity (%) 53.12 47.52 36.88 30.65 25.74 21.29
Loss coverage (%) 24.35 19.15 12.00 7.65 4.55 2.25
(i)Using a standard prepayment convention. CPR--Conditional
prepayment rate. N/A--Not applicable.
Notwithstanding the use of excess interest as credit enhancement
in the transaction structure,we applied our usual front- and
back-loaded rather than bulleted (e.g., semiannual or annuallump
sum) default timing curves in our analysis. This reflects our view
of the potential volatility ofcash flows given the newly originated
loans are subject to third-party due diligence and
includestructural considerations, such as sequential principal
allocations among all classes and partialP&I advancing by the
servicer.
We applied the foreclosure frequencies, loss severities, and
combinations of the stresses notedabove in our cash flow runs, and
observed some periodic missed interest due to the liquidity
stressassociated with no advancing. To pass our applicable
rating-specific stresses, the interestdeferrals (or interest
carryforward amounts) resulting from any missed interest payments
on thecertificates have to be paid in full by the maturity date.
All deferred interest was paid back withinterest under the
applicable rating-specific stresses in our cash flow projections.
The resultsshow that each rated class in the transaction is
enhanced to a degree consistent with theassigned preliminary
ratings.
Table 11
Structural Assessment
Class RatingInitial class
size (%)Initial credit
enhancement (%)Loss coverage
(%)Percentage point difference between credit
enhancement and loss coverage
A-1 AAA (sf) 75.90 24.10 24.35 (0.25)
A-2 AA (sf) 4.60 19.50 19.15 0.35
A-3 A (sf) 7.25 12.25 12.00 0.25
M-1 BBB(sf)
4.60 7.65 7.65 0.00
B-1 BB (sf) 3.45 4.20 4.55 (0.35)
B-2 B (sf) 2.30 1.90 2.25 (0.35)
B-3 NR 1.90 0.00 0.00 0.00
NR--Not rated.
WAC deterioration stress
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The transaction structure allows excess spread to provide some
of the credit enhancement. Weapplied a WAC deterioration stress
that steps up linearly from zero basis points (bps) to 59 bpsover
10 years and remains at that level thereon, to address the
potential for the pool's WAC todecline as higher coupon loans
prepay or default and thus stress the excess spread.
Interest stresses
In this transaction, extraordinary trust expense payments reduce
the net WAC rate, whicheffectively allocates the extraordinary
trust expenses pro rata across all senior and
subordinatecertificateholders by reducing their interest payments
by the amount of the extraordinary trustexpenses paid (subject to
the annual cap). Although the extraordinary trust expenses are
passedthrough as reduced contractual interest due to
certificateholders, we ran these expenses at theircapped amounts,
to test any impact on the securities due to the dependence on
excess spread asa form of credit enhancement to the securities and
the presence of certain structural featuressuch as limited P&I
advancing, and because interest payments on the securities are
deferrable.
Imputed Promises Analysis
Based on our criteria, "Principles For Rating Debt Issues Based
On Imputed Promises," publishedDec. 19, 2014, and the associated
guidance "Guidance: Principles For Rating Debt Issues BasedOn
Imputed Promises," published July 26, 2019, we impute the interest
owed to thesecurityholders when rating U.S. RMBS transactions where
credit-related events can reduceinterest owed to the tranches
across the capital structure rather than an allocation of
suchcredit-related loss to the available credit support. WAC
deterioration that occurs because ofdefaults, repurchases, or
prepayments is not considered credit related, and, therefore, it is
notconsidered as part of this analysis.
Because this transaction provides for credit-related loan
modifications and extraordinary trustexpenses to reduce the net
WAC, at which the transaction's bond coupons are capped, we
appliedthe approach outlined in the criteria to assess the maximum
potential rating (MPR) that couldapply based on our projected
interest reduction amount (PIRA). As this is a new-issue
transaction,we did not account for any cumulative interest
reduction amount.
Consistent with our criteria, we assumed that 50% of the loans
projected to default would bemodified, which, when added to the
extraordinary trust expenses, resulted in a maximum PIRA onthe
rated certificates that is significantly below the 4.5% threshold.
We stressed extraordinarytrust expenses by the relevant
extraordinary expense application factor for four years,
betweenpayment periods 13 and 60. Based on the results of our
analysis, there was no impact to the MPRon the certificates.
Historically, we have observed that extraordinary trust expenses
have been minimal when they dooccur and have been extremely limited
in pre-2009 RMBS transactions. We continue to expecttheir actual
occurrence in post-2009 transactions to be rare.
Operational Risk Assessment
Our criteria "Global Framework For Assessing Operational Risk In
Structured FinanceTransactions," published Oct. 9, 2014, present
our methodology and assumptions for assessingcertain operational
risks (severity, portability, and disruption risks) associated with
asset typesand key transaction parties (KTPs) that provide an
essential service to a structured finance issuer.
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According to the criteria, we cap the ratings on a transaction
if we believe operational risk couldlead to credit instability and
affect the ratings.
As provided in the operational risk criteria, for severity risk
and portability risk, there are threepossible rankings: high,
moderate, or low. For disruption risk, there are four possible
rankings:very high, high, moderate, or low. The rankings for each
of the three types of risks determine theMPR that can be assigned
to a structured finance security for a given KTP before
givingconsideration to any provisions for a backup KTP, such as a
master servicer.
According to our criteria, we rank severity and portability risk
for nonprime residential mortgagecollateral as moderate and low,
respectively. For STAR 2020-3, the master servicer, Wells FargoBank
N.A. is the KTP. We consider the disruption risk for this master
servicer as low. Given theserisk assessments, our criteria does not
cap the ratings on the transaction.
Related Criteria
- Criteria | Structured Finance | General: Methodology To Derive
Stressed Interest Rates InStructured Finance, Oct. 18, 2019
- Criteria | Structured Finance | Legal: U.S. Structured Finance
Asset Isolation AndSpecial-Purpose Entity Criteria, May 15,
2019
- Criteria | Structured Finance | General: Incorporating
Sovereign Risk In Rating StructuredFinance Securities: Methodology
And Assumptions, Jan. 30, 2019
- Criteria | Structured Finance | RMBS: Assumptions Supplement
For Methodology AndAssumptions For Rating U.S. RMBS Issued 2009 And
Later, Feb. 22, 2018
- Criteria | Structured Finance | RMBS: U.S. Residential
Mortgage Operational AssessmentRanking Criteria, Feb. 22, 2018
- Criteria | Structured Finance | RMBS: Methodology And
Assumptions For Rating U.S. RMBSIssued 2009 And Later, Feb. 22,
2018
- General Criteria: Methodology For Linking Long-Term And
Short-Term Ratings, April 7, 2017
- Criteria | Structured Finance | General: Structured Finance
Temporary Interest ShortfallMethodology, Dec. 15, 2015
- General Criteria: Principles For Rating Debt Issues Based On
Imputed Promises, Dec. 19, 2014
- Criteria | Structured Finance | General: Global Framework For
Cash Flow Analysis Of StructuredFinance Securities, Oct. 9,
2014
- Criteria | Structured Finance | General: Criteria Methodology
Applied To Fees, Expenses, AndIndemnifications, July 12, 2012
- General Criteria: Global Investment Criteria For Temporary
Investments In TransactionAccounts, May 31, 2012
- Criteria | Structured Finance | General: Methodology For
Servicer Risk Assessment, May 28,2009
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2489507
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Related Research
- Servicer Evaluation: Select Portfolio Servicing Inc., July 23,
2020
- Select Servicer List, July 2, 2020
- Economic Research: The U.S. Faces A Longer And Slower Climb
From The Bottom, June 25,2020
- U.S. Residential Mortgage Input File Format For LEVELS, March
6, 2020
- S&P Global Ratings Is Assessing The Impact Of COVID-19 On
Mortgage Market Outlooks ForGlobal RMBS, April 17, 2020
- Economic Research: An Already Historic U.S. Downturn Now Looks
Even Worse, April 16, 2020
- Servicer Evaluation: Wells Fargo Bank N.A., Oct. 10, 2019
- S&P Global Ratings Definitions, Sept. 18, 2019
- Credit Rating Model: LEVELS Model For U.S. Residential
Mortgage Loans, Aug. 6, 2019
- S&P Global Ratings Publishes List Of Third-Party Due
Diligence Firms Reviewed For U.S. RMBSAs Of Aug. 5, 2019, Aug. 5,
2019
- Key Factors For Assessing U.S. Non-Qualified Mortgage Bank
Statement Loans, April 10, 2019
- Credit Rating Model: Intex RMBS Cash Flow Model, April 7,
2017
- Global Structured Finance Scenario And Sensitivity Analysis
2016: The Effects Of The Top FiveMacroeconomic Factors, Dec. 16,
2016
- Standard & Poor's Comfortable With SFIG Draft Proposal
Regarding TRID Due Diligence, April25, 2016
- Older RMBS Transactions Face Increased Tail Risk As Their
Pools Shrink, Aug. 9, 2012
In addition to the criteria specific to this type of security
(listed above), the following criteriaarticles, which are generally
applicable to all ratings, may have affected this rating
action:"Counterparty Risk Framework: Methodology And Assumptions,"
March 8, 2019; "Post-DefaultRatings Methodology: When Does Standard
& Poor's Raise A Rating From 'D' Or 'SD'?," March 23,2015;
"Global Framework For Assessing Operational Risk In Structured
Finance Transactions,"Oct. 9, 2014; "Methodology: Timeliness of
Payments: Grace Periods, Guarantees, And Use of 'D'And 'SD'
Ratings," Oct. 24, 2013; "Criteria For Assigning 'CCC+', 'CCC',
'CCC-', And 'CC' Ratings,"Oct. 1, 2012; "Methodology: Credit
Stability Criteria," May 3, 2010; and "Use of CreditWatch
AndOutlooks," Sept. 14, 2009.
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Standard & Poor’s | Research | August 3, 2020 252489507
Presale: Starwood Mortgage Residential Trust 2020-3
Research:Rationale Noteworthy FeaturesAcquisition processLoans
in forbearance/defermentAmWest as servicerClayton as R&W breach
reviewerSequential-pay structure
Collateral SummaryTransaction StructureStrengths And
WeaknessesCredit Analysis and AssumptionsDocumentation typeQM and
ATR standardsServicer advancing obligationsBorrowers with multiple
loans
Structural FeaturesGeographic ConcentrationLarge Loans And Tail
Risk ConsiderationsMortgage Operational Assessment (MOA)Third-Party
Due Diligence ReviewR&WsAttributes of the R&W framework
Cash Flow And Scenario AnalysisWAC deterioration stressInterest
stresses
Imputed Promises AnalysisOperational Risk AssessmentRelated
CriteriaRelated Research