New York, January 25, 2021 -- Moody's Investors Service, ("Moody's") has
assigned provisional ratings to seven classes of notes issued by Mello
Warehouse Securitization Trust 2021-1 (the transaction).
The ratings range from (P)Aaa (sf) to (P)B2 (sf). The securities
in this transaction are backed by a revolving pool of newly originated
first-lien, fixed rate and adjustable rate, residential
mortgage loans which are eligible for purchase by Fannie Mae, Freddie
Mac or in accordance with the criteria of Ginnie Mae for the guarantee
of securities backed by mortgage loans to be pooled in connection with
the issuance of Ginnie Mae securities. The pool may also include
FHA Streamline mortgage loans or VA-IRRR mortgage Loans,
which may have limited valuation and documentation. The revolving
pool has a total size of $300,000,000.
The complete rating action are as follows.
Issuer: Mello Warehouse Securitization Trust 2021-1
Cl. A, Provisional Rating Assigned (P)Aaa (sf)
Cl. B, Provisional Rating Assigned (P)Aa2 (sf)
Cl. C, Provisional Rating Assigned (P)A2 (sf)
Cl. D, Provisional Rating Assigned (P)Baa2 (sf)
Cl. E, Provisional Rating Assigned (P)Baa3 (sf)
Cl. F, Provisional Rating Assigned (P)B2 (sf)
Cl. G, Provisional Rating Assigned (P)B2 (sf)
RATINGS RATIONALE
The transaction is based on a repurchase agreement between loanDepot.com
LLC ("loanDepot"), as repo seller, and Mello Warehouse
Securitization Trust 2021-1 as buyer. LD Holdings Group
LLC ("LD Holdings", senior unsecured rating B2) guarantees loanDepot's
payment obligations under the securitization's repurchase agreement.
We base our Aaa expected losses of 27.56% and base case
expected losses of 3.87% on a scenario in which loanDepot
and the guarantor LD Holdings does not pay the aggregate repurchase price
to pay off the notes at the end of the facility's three-year revolving
term, and the repayment of the notes will depend on the credit performance
of the remaining static pool of mortgage loans. To assess the credit
quality of the static pool, we created a hypothetical adverse pool
based on the facility's eligibility criteria, which includes no
more than 5% (by unpaid balance) adjustable-rate mortgage
(ARM) loans. Loans which are subject to payment forbearance,
a trial modification, or delinquency are ineligible to enter the
facility. We analyzed the pool using our US MILAN model and made
additional pool level adjustments to account for risks related to (i)
a weak representation and warranty enforcement framework (ii) existence
of compliance findings related to the TILA-RESPA Integrated Disclosure
(TRID) Rule in third-party diligence reports from prior Mello Warehouse
Securitization Trust transactions, which have raised concerns about
potential losses owing to TRID for the loans in this transaction.
The ratings on the notes are be the higher of (i) the repo guarantor's
(LD Holdings Group LLC) rating and (ii) the rating of the notes based
on the credit quality of the mortgage loans backing the notes (i.e.,
absent consideration of the repo guarantor). If the repo guarantor
does not satisfy its obligations under the guaranty, then the ratings
on the notes will only reflect the credit quality of the mortgage loans
backing the notes.
Collateral Description:
The mortgage loans will be newly originated, first-lien,
fixed-rate and adjustable rate mortgage loans that also comply
with the eligibility criteria set forth in the master repurchase agreement.
The aggregate principal balance of the purchased loans at closing will
be $300,000,000. Per the transaction documents,
the mortgage pool will have a minimum weighted average FICO of 730 and
a maximum weighted average LTV of 82%.
The ultimate composition of the pool of mortgage loans remaining in the
facility at the end of the three-year term upon default of loanDepot
is unknown. We modeled this risk through evaluating the credit
risk of an adverse pool constructed using the eligibility criteria.
In generating the adverse pool: 1) We assumed the worst numerical
value from the criteria range for each loan characteristic. For
example, the credit score of the loans is not less than 660 and
the weighted average credit score of the purchased mortgage loans is not
less than 730; the maximum debt-to-income ratio is
50% in the adverse pool (per eligibility criteria); 2) We
assumed risk layering for the loans in the pool within the eligibility
criteria. For example, loans with the highest LTV also had
the lowest FICO to the extent permitted by the eligibility criteria;
3) We took into account the specified restrictions in the eligibility
criteria such as the weighted average LTV and FICO; 4) Since these
loans are eligible for purchase by the agencies, we also took into
account the specified restrictions in the underwriting criteria.
For example, no more than 97% LTV for fixed rate purchased
loans and 95% for adjustable rate purchase loans.
The transaction allows the warehouse facility to include up to 50%
(consistent with the prior deal) of mortgage loans (by outstanding principal
balance) whose collateral documents have not yet been delivered to the
custodian (wet loans). This transaction is more vulnerable to the
risk of losses owing to fraud from wet loans during the time it does not
hold the collateral documents. There are risks that a settlement
agent will fail to deliver the mortgage loan files after receipt of funds,
or the sponsor of the securitization, either by committing fraud
or by mistake, will pledge the same mortgage loan to multiple warehouse
lenders. However, our analysis has considered several operational
mitigants to reduce such risks, including (i) collateral documents
must be delivered to the custodian within 10 business days following a
wet loan's funding or it becomes ineligible, (ii) the transaction
will only fund a wet loan if the closing of the mortgage loan is handled
by a settlement agent (covered by errors and omissions insurance policy)
who will provide a closing protection letter to the repo seller (except
for attorney closings in the State of New York), (iii) the repo
seller maintains a fidelity bond in place, naming the issuer as
an additional insured party, in the event of fraud in connection
with the closing of the wet loans, (iv) the repo seller has acquired
services of an independent third party fraud detection and verification
vendor, PitchPoint Solutions Inc. (settlement agent vendor),
to verify credentials of settlement agents and the bank accounts for wires
in connection with the funding of such wet loans, and (v) Deutsche
Bank National Trust Company (Baa1), a highly rated independent counterparty,
act as the mortgage loan custodian. We view these mitigants as
adequate measures to prevent the likelihood of fraud by the settlement
agent or the sponsor.
The loans will be originated and serviced by loanDepot.com,
LLC (loanDepot). U.S. Bank National Association will
be the standby servicer. We consider the overall servicing arrangement
for this pool to be adequate. At the transaction closing date,
the servicer acknowledges that it is servicing the purchased loans for
the joint benefit of the issuer and the indenture trustee.
Transaction Structure:
Our analysis of the securitization structure includes reviewing bankruptcy
remoteness, assessing the ability of the indenture trustee to take
possession of the collateral in an event of default, conformity
of the collateral with the eligibility criteria as well as allocation
of funds to the notes.
The transaction is structured as a master repurchase agreement between
loanDepot (the repo seller) and the Mello Warehouse Securitization Trust
2021-1 (the trust or issuer). The U.S. Bankruptcy
Code provides repurchase agreements, security contracts and master
netting agreements a "safe harbor" from the Bankruptcy Code automatic
stay. Due to this safe harbor, in the event of a bankruptcy
of loanDepot or the guarantor, the issuer will be exempt from the
automatic stay and thus, the issuer will be able to exercise remedies
under the master repurchase agreement, which includes seizing the
collateral.
During the revolving period, the repo seller's obligations will
include making timely payments of interest accrued on the notes as well
as the aggregate monthly fees. Failure to make such payments will
constitute a repo trigger event whereby the indenture trustee will seize
the collateral and terminate the repo agreement. It is expected
that the notes will not receive payments of principal until the expected
maturity date or after the occurrence and continuance of an event of default
under the indenture unless the repo seller makes an optional prepayment.
In an event of default, principal will be distributed sequentially
amongst the classes. Realized losses will be allocated in a reverse
sequential order.
In addition, since the pool may consist of both fixed rate and adjustable
rate mortgages, the transaction may be exposed to potential risk
from interest rate mismatch. To account for the mismatch,
we assumed a stressed LIBOR curve by increasing the one-month LIBOR
rate incrementally for a certain period until it reaches the maximum allowable
interest rate as described in the transaction documents.
Ongoing Due Diligence
During the revolving period, Clayton Services LLC (or a qualified
successor diligence provider appointed by the repo seller) will conduct
ongoing due diligence every 90 days on 100 randomly selected loans (other
than wet loans). The first review will be performed 30 days following
the closing date. The scope of the review will include credit underwriting,
regulatory compliance, valuation and data integrity.
Because Moody's analysis is based on a scenario in which the facility
terms out, due diligence reviews provide some control on the credit
quality of the collateral. The due diligence framework in this
transaction combined with the collateral eligibility controls help mitigate
the risks of adverse selection in this transaction.
While the due diligence review will provide some validation on the quality
of the loans, it may not be fully representative of the collateral
quality of the facility at all times. This is mainly due to the
frequency of the due diligence review, the revolving nature of the
collateral pool, and that the review will be conducted on a sample
basis. Also, by the time the due diligence review is completed,
some of the sampled loans may no longer be in the pool.
Representation and Warranties
For a mortgage loan to qualify as an eligible mortgage loan, the
loan must meet representations and warranties described in the repurchase
agreement. The substance of the representations and warranties
are consistent with those in our published criteria for representations
and warranties for U.S. RMBS transactions. After
a repo event of default, which includes the repo seller or buyer's
failure to purchase or repurchase mortgage loans from the facility,
the repo seller or buyer's failure to perform its obligations or comply
with stipulations in the master repurchase agreement, bankruptcy
or insolvency of the buyer or the repo seller, any breach of covenant
or agreement that is not cured within the required period of time,
as well as the repo seller's failure to pay price differential when due
and payable pursuant to the master repurchase agreement, a delinquent
loan reviewer will conduct a review of loans that are more than 120 days
delinquent to identify any breaches of the representations and warranties
provided by the underlying sellers. Loans that breach the representations
and warranties will be put back to the repo seller for repurchase.
While the transaction has the above described representation and warranties
enforcement mechanism, in the amortization period, after an
event of default where the repo seller did not pay the notes in full,
it is unlikely that the repo seller will repurchase the loans.
In addition, the noteholders (holding 100% of the aggregate
principal amount of all notes) may waive the requirement to appoint such
delinquent loan reviewer.
Elevated social risks associated with the coronavirus
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Our analysis
has considered the effect on the performance of residential mortgage loans
from the current weak US economic activity and a gradual recovery for
the coming months. Although an economic recovery is underway,
it is tenuous and its continuation will be closely tied to containment
of the virus. As a result, the degree of uncertainty around
our forecasts is unusually high. We regard the coronavirus outbreak
as a social risk under our ESG framework, given the substantial
implications for public health and safety.
We have not made any adjustments related to coronavirus for this transaction
because (i) loans that are subject to payment forbearance or a trial modification
are ineligible to enter the facility, and the repo seller must repurchase
loans in the facility that become subject to forbearance, (ii) delinquent
loans are ineligible to enter the facility, and (iii) loans are
unlikely to be modified while in the facility due to the seasoning constraint
specified in the eligibility criteria. The repo seller will be
required to repurchase any loans that do not meet the "eligible loan"
criteria.
Factors that would lead to an upgrade or downgrade of the ratings:
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
the state of the housing market.
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 our original expectations as a result of a weaker
collateral composition than that in the adverse pool, financial
distress of any of the counterparties. Transaction performance
also depends greatly on the US macro economy and housing market.
Methodology
The methodologies used in these ratings were "Moody's Approach to
Rating US RMBS Using the MILAN Framework" published in April 2020
and available at https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1201303,
and Rating Transactions Based on the Credit Substitution Approach:
Letter of Credit-backed, Insured and Guaranteed Debts published
in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1068154.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
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_1261038.
The analysis relies on an assessment of collateral characteristics to
determine the collateral loss distribution, that is, the function
that correlates to an assumption about the likelihood of occurrence to
each level of possible losses in the collateral. As a second step,
Moody's evaluates each possible collateral loss scenario using a
model that replicates the relevant structural features to derive payments
and therefore the ultimate potential losses for each rated instrument.
The loss a rated instrument incurs in each collateral loss scenario,
weighted by assumptions about the likelihood of events in that scenario
occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vincent Lai
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