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Rating Action:

Moody's assigns Provisional ratings to Mello Warehouse Securitization Trust 2021-1

25 Jan 2021

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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