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Rating Action:

Moody's Investors Service ("Moody's") assigns provisional ratings to Prime RMBS issued by OBX 2019-INV2 Trust

11 Jun 2019

New York, June 11, 2019 -- Moody's Investors Service has assigned provisional ratings to 38 classes of residential mortgage-backed securities (RMBS) issued by OBX 2019-INV2 Trust (OBX 2019-INV2). The ratings range from (P)Aaa (sf) to (P)B3 (sf).

OBX 2019-INV2, the third rated issue from Onslow Bay Financial LLC (Onslow Bay) in 2019, is a prime RMBS securitization of fixed-rate, agency-eligible mortgage loans secured by first liens on non-owner occupied residential properties with original terms to maturity of mostly 30 years. All of the loans are underwritten in accordance with Freddie Mac or Fannie Mae underwriting guidelines, which take into consideration, among other factors, the income, assets, employment and credit score of the borrower. All of the loans were underwritten using one of the government-sponsored enterprises' (GSE) automated underwriting systems (AUS) and received an "Approve" or "Accept" recommendation.

The mortgage loans for this transaction were acquired by the seller and sponsor, Onslow Bay, either directly from Quicken Loans Inc. (75.7%), JPMorgan Chase Bank, N.A. (13.7%), or from various mortgage lending institutions, each of which originated less than 4% of the mortgage loans in the pool.

Quicken Loans Inc. (Quicken Loans), Select Portfolio Servicing, Inc. (SPS), and Specialized Loan Servicing LLC (SLS) will service 75.7%, 19.9%, and 4.4% of the aggregate balance of the mortgage pool, respectively, and Wells Fargo Bank, N.A. (Wells Fargo) will be the master servicer. Certain servicing advances and advances for delinquent scheduled interest and principal payments will be funded, unless the related mortgage loan is 120 days or more delinquent or the servicer determines that such delinquency advances would not be recoverable. The master servicer is obligated to fund any required monthly advances if the servicer fails in its obligation to do so. The master servicer and servicer will be entitled to reimbursements for any such monthly advances from future payments and collections with respect to those mortgage loans.

OBX 2019-INV2 has a shifting interest structure with a five-year lockout period that benefits from a senior subordination floor and a subordination floor. We coded the cash flow to each of the notes using Moody's proprietary cash flow model. In our analysis of tail risk, we considered the increased risk from borrowers with more than one mortgage in the pool.

The complete rating actions are as follows:

Issuer: OBX 2019-INV2 Trust

Cl. A-1, Assigned (P)Aaa (sf)

Cl. A-2, Assigned (P)Aaa (sf)

Cl. A-3, Assigned (P)Aaa (sf)

Cl. A-4, Assigned (P)Aaa (sf)

Cl. A-5, Assigned (P)Aaa (sf)

Cl. A-6, Assigned (P)Aaa (sf)

Cl. A-7, Assigned (P)Aaa (sf)

Cl. A-8, Assigned (P)Aaa (sf)

Cl. A-9, Assigned (P)Aaa (sf)

Cl. A-10, Assigned (P)Aaa (sf)

Cl. A-11, Assigned (P)Aaa (sf)

Cl. A-12, Assigned (P)Aaa (sf)

Cl. A-13, Assigned (P)Aaa (sf)

Cl. A-14, Assigned (P)Aa1(sf)

Cl. A-15, Assigned (P)Aa1 (sf)

Cl. A-16, Assigned (P)Aaa (sf)

Cl. A-17, Assigned (P)Aaa (sf)

Cl. A-18, Assigned (P)Aaa (sf)

Cl. A-19, Assigned (P)Aa1 (sf)

Cl. A-20, Assigned (P)Aa1 (sf)

Cl. A-21, Assigned (P)Aaa (sf)

Cl. A-22, Assigned (P)Aaa (sf)

Cl. A-23, Assigned (P)Aaa (sf)

Cl. A-24, Assigned (P)Aaa (sf)

Cl. A-25, Assigned (P)Aa1 (sf)

Cl. A-26, Assigned (P)Aaa (sf)

Cl. A-27, Assigned (P)Aaa (sf)

Cl. A-28, Assigned (P)Aaa (sf)

Cl. A-29, Assigned (P)Aaa (sf)

Cl. A-30, Assigned (P)Aaa (sf)

Cl. A-31, Assigned (P)Aaa (sf)

Cl. B-1, Assigned (P)Aa3 (sf)

Cl. B-1A, Assigned (P)Aa3 (sf)

Cl. B-2, Assigned (P)A2 (sf)

Cl. B-2A, Assigned (P)A2 (sf)

Cl. B-3, Assigned (P)Baa2 (sf)

Cl. B-4, Assigned (P)Ba2 (sf)

Cl. B-5, Assigned (P)B3 (sf)

RATINGS RATIONALE

Summary Credit Analysis and Rating Rationale

Moody's expected cumulative net loss on the aggregate pool is 0.90% in a base scenario and 9.90% at a stress level consistent with the Aaa (sf) ratings.

Our loss estimates are based on a loan-by-loan assessment of the securitized collateral pool as of the cut-off date using Moody's Individual Loan Level Analysis (MILAN) model. Loan-level adjustments to the model included adjustments to borrower probability of default for higher and lower borrower debt-to-income ratios (DTIs), for borrowers with multiple mortgaged properties, self-employed borrowers, and for risks related to mortgaged properties in Homeowner associations (HOAs) in super lien states. Our final loss estimates also incorporate adjustments for origination quality and the strength of the representation and warranty (R&W) framework.

We base our provisional ratings on the notes on the credit quality of the mortgage loans, the structural features of the transaction, our assessments of the origination quality and servicing arrangement, the strength of the third party due diligence and the R&W framework of the transaction.

Collateral Description

The OBX 2019-INV2 transaction is a securitization of 1,087 mortgage loans secured by fixed-rate, agency-eligible first liens on non-owner occupied one-to-four family residential properties, planned unit developments and condominiums with an unpaid principal balance of $383,759,828. All of the loans have a 30-year original term, except for one which has a 25-year original term. The mortgage pool has a WA seasoning of about 6 months. The loans in this transaction have strong borrower credit characteristics with a weighted average original FICO score of 770 and a weighted-average original combined loan-to-value ratio (CLTV) of 64.9%. In addition, 20.4% of the borrowers are self-employed and refinance loans comprise about 54.2% of the aggregate pool. The pool has a high geographic concentration with 58.5% of the aggregate pool located in California, with 17.0% located in the Los Angeles-Long Beach-Anaheim MSA and 14.5% located in the San Francisco-Oakland-Hayward MSA. The characteristics of the loans underlying the pool are generally comparable to other recent prime RMBS transactions backed primarily by 30-year mortgage loans that we have rated.

Origination Quality

Majority of the mortgage loans in the pool were originated by Quicken Loans (75.7%) and JPMorgan Chase Bank, N.A. (13.7%). We applied an adjustment to the loss levels for loans originated by Quicken Loans due to the relatively worse performance of their agency-eligible investment property mortgage loans compared to similar loans from other originators in the Freddie Mac and Fannie Mae database. All of the loans comply with Freddie Mac and Fannie Mae underwriting guidelines, which take into consideration, among other factors, the income, assets, employment and credit score of the borrower. All the loans received an "Approve" or "Accept" recommendation from one of the government-sponsored enterprises' (GSE) automated underwriting systems (AUS).

Servicing Arrangement

Quicken Loans will make principal and interest advances (subject to a determination of recoverability) for the mortgage loans that it services. The P&I Advancing Party (Onslow Bay) will make principal and interest advances (subject to a determination of recoverability) for the mortgage loans serviced by SPS and SLS to the extent that such delinquency advances exceed amounts on deposit for future distribution, the excess servicing strip fee that would otherwise be paid to the Class A-IO-S notes and the P&I Advancing Party fee.

The master servicer is obligated to fund any required monthly advances if a servicer or any other party obligated to advance fails in its obligation to do so. The master servicer and servicers will be entitled to be reimbursed for any such monthly advances from future payments and collections (including insurance and liquidation proceeds) with respect to those mortgage loans.

No advances of delinquent principal or interest will be made for mortgage loans that become 120 days or more delinquent under the MBA method. Subsequently, if there are mortgage loans that are 120 days or more delinquent on any payment date, there will be a reduction in amounts available to pay principal and interest otherwise payable to note holders.

Unlike the previous OBX Trust transaction we rated, with respect to the mortgage loans serviced by SPS and SLS, the controlling holder has the right (i) to oversee certain matters relating to the servicing of defaulted mortgage loans (such as approving any modifications and actions relating to the management of REO property), (ii) to direct the master servicer to terminate a servicer upon an uncured servicing event of default under the related servicing agreement, and (iii) to direct the transaction parties to take certain actions in connection with a proposed acquisition of a mortgaged property as a result of an eminent domain proceeding by a governmental entity.

Third Party Review and Reps & Warranties (R&W)

Two third party review (TPR) firms verified the accuracy of the loan-level information that we received from the sponsor. These firms conducted detailed credit, property valuation, data integrity and regulatory compliance reviews on 100% of the mortgage pool. The TPR checked to ensure that all of the reviewed loans were in compliance with (AUS) underwriting guidelines and AUS loan eligibility requirements with generally no material compliance, credit data or valuation issues. The results indicated that majority of reviewed loans were in compliance with the underwriting guidelines, government regulations. There were generally no material findings. In cases where there were findings, there were significant and satisfactory compensating factors.

The R&W provider is the sponsor (Onslow Bay), an unrated entity that may not have the financial wherewithal to purchase defective loans. However, all the loans in the pool had independent due diligence review and the results of the review revealed compliance with underwriting guidelines and regulations, as well as overall strong valuation quality. These results indicate that the loans most likely do not breach the R&Ws. Also, the transaction benefits from unqualified R&Ws and an independent breach reviewer. The R&Ws do not protect against issues discovered and disclosed during the due diligence review. The R&W's are not subject to sunset, other than the six-year statute of limitations for R&W claims in New York. We increased our loss levels to account for some weaknesses in the overall R&W framework due to the financial weakness of the R&W provider and the lack of a repurchase mechanism for loans experiencing an early payment default and weaknesses in the review procedures compared to other prime jumbo transactions.

Tail Risk and Subordination Floor

The transaction cash flows follow a shifting interest structure that allows subordinated bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool shrinks, senior bonds are exposed to increased performance volatility, known as tail risk. The transaction provides for a senior subordination floor of 2.00% of the initial aggregate balance of the pool, which mitigates tail risk by protecting the senior bonds from eroding credit enhancement over time. Additionally there is a subordination lock-out amount equal to 0.90% of the initial aggregate balance of the pool. Based on our tail risk analysis, the level of the floors are slightly lower than our credit neutral floors, but not sufficiently so to merit an adjustment.

Exposure to Extraordinary expenses

Extraordinary trust expenses in this transaction are deducted directly from the available distribution amount. We believe there is a very low likelihood that the rated notes in this transaction will incur any losses from extraordinary expenses or indemnification payments from potential future lawsuits against key deal parties. Firstly, the loans are of prime quality and were originated under a regulatory environment that requires tighter controls for originations than pre-crisis, which reduces the likelihood that the loans have defects that could form the basis of a lawsuit. Secondly, the transaction has reasonably well-defined processes in place to identify loans with defects on an ongoing basis. In this transaction, an independent breach reviewer must review loans for breaches of representations and warranties when certain clearly defined triggers have been breached which reduces the likelihood that parties will be sued for inaction. Furthermore, the issuer has disclosed the results of a credit, compliance and valuation review of 100% of the mortgage loans by independent third parties. Thirdly, extraordinary trust expenses (except for those associated with servicing transfers) are capped at $275,000 which limits the exposure of the trust to potential losses due to such extraordinary trust expenses. We made an adjustment to our loss levels to account for the risk of losses due to such extraordinary trust expenses.

Other Transaction Parties

Wilmington Savings Fund Society, FSB will act as the trustee for this transaction. Wells Fargo will act as a paying agent, master servicer, note registrar and custodian for this transaction. In its capacity as custodian, Wells Fargo will hold the collateral documents, which include, the original note and mortgage and any intervening assignments of mortgage.

Wells Fargo provides oversight of the servicer. We consider Wells Fargo as a strong master servicer of residential loans. Wells Fargo's oversight encompasses loan administration, default administration, compliance and cash management.

Factors that would lead to an upgrade or downgrade of the ratings:

Down

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.

Up

Levels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline from Moody's original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market.

Methodology

The principal methodology used in these ratings was "Moody's Approach to Rating US Prime RMBS" published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

In addition, Moody's publishes a weekly summary of structured finance credit ratings and methodologies, available to all registered users of our website, www.moodys.com/SFQuickCheck.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1179318 .

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Rosby Kome-Mensah
Associate Lead 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

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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