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Rating Action:

Moody's assigns provisional ratings to New Residential Mortgage Loan Trust 2018-2

25 Apr 2018

Moody's Investors Service, ("Moody's") assigns provisional ratings to New Residential Mortgage Loan Trust 2018-2

New York, April 25, 2018 -- Moody's Investors Service has assigned provisional ratings to 31 classes of notes issued by New Residential Mortgage Loan Trust 2018-2 ("NRMLT 2018-2"). The NRMLT 2018-2 transaction is a $426.0 million securitization of first lien, seasoned performing and re-performing mortgage loans with weighted average seasoning of 164 months, a weighted average updated LTV ratio of 57.4% and a weighted average updated FICO score of 692. Based on the OTS methodology, 84.1% of the loans by scheduled balance have been current every month in the past 24 months. Additionally, 35.8% of the loans in the pool have been previously modified. Nationstar Mortgage LLC (Nationstar Mortgage), Ocwen Loan Servicing, LLC (Ocwen), Wells Fargo Bank, N.A. (Wells Fargo), PNC Mortgage, Specialized Loan Servicing LLC (SLS), New Penn Financial, LLC d/b/a Shellpoint Mortgage Servicing (Shellpoint), and Fay Servicing, LLC (Fay) will act as primary servicers. Nationstar Mortgage will act as master servicer and successor servicer and Shellpoint will act as the special servicer.

The complete rating action is as follows:

Issuer: New Residential Mortgage Loan Trust 2018-2

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

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

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

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

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

Cl. A-2, Assigned (P)Aa1 (sf)

Cl. B-1, Assigned (P)Aa2 (sf)

Cl. B-1A, Assigned (P)Aa2 (sf)

Cl. B-1B, Assigned (P)Aa2 (sf)

Cl. B-1C, Assigned (P)Aa2 (sf)

Cl. B-1D, Assigned (P)Aa2 (sf)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cl. B-5, Assigned (P)B2 (sf)

Cl. B-5A, Assigned (P)B2 (sf)

Cl. B-5B, Assigned (P)B2 (sf)

Cl. B-5C, Assigned (P)B2 (sf)

Cl. B-5D, Assigned (P)B2 (sf)

Cl. B-7, Assigned (P)B1 (sf)

RATINGS RATIONALE

Our losses on the collateral pool equal 4.85% in an expected scenario and reach 23.35% at a stress level consistent with the Aaa ratings on the senior classes. We based our expected losses for the pool on our estimates of (1) the default rate on the remaining balance of the loans and (2) the principal recovery rate on the defaulted balances. The final expected losses for the pool reflect the third party review (TPR) findings and our assessment of the representations and warranties (R&Ws) framework for this transaction. Also, the transaction contains a mortgage loan sale provision, the exercise of which is subject to potential conflicts of interest. As a result of this provision, we increased our expected losses for the pool.

To estimate the losses on the pool, we used an approach similar to our surveillance approach. Under this approach, we apply expected annual delinquency rates, conditional prepayment rates (CPRs), loss severity rates and other variables to estimate future losses on the pool. Our assumptions on these variables are based on the observed rate of delinquency on seasoned modified and non-modified loans, the collateral attributes of the pool including the percentage of loans that were delinquent in the past 24 months, and the observed performance of recent New Residential Mortgage Loan Trust issuances rated by Moody's. For this pool, we used default burnout and voluntary CPR assumptions similar to those detailed in our "US RMBS Surveillance Methodology" for Alt-A loans originated before 2005. We then aggregated the delinquencies and converted them to losses by applying pool-specific lifetime default frequency and loss severity assumptions

Collateral Description

NRMLT 2018-2 is a securitization of seasoned performing and re-performing residential mortgage loans which the seller, NRZ Sponsor IX LLC, has previously purchased in connection with the termination of various securitization trusts. The transaction is comprised of 3,628 loans of which 9.9% by principal balance are ARMs. For the loans in the pool, 64.2% by balance have never been modified and have been performing while 35.8% of the loans were previously modified but are now current and cash flowing.

The updated value of properties in this pool were provided by a third party firm using a home data index (HDI) and/or an updated broker price opinion (BPO). BPOs were provided for a sample of 1,864 out of the 3,628 properties contained within the securitization. HDI values were provided for 3,614 of the properties contained within the securitization. The weighted average updated LTV ratio on the collateral is 57.4%, implying an average of 42.6% borrower equity in the properties. The LTV is calculated using the lower of the updated BPO and HDI when both values are available.

Third-Party Review ("TPR") and Representations & Warranties ("R&W")

Two third party due diligence providers, AMC and Recovco, conducted a compliance review on a sample of 1,878 and 77 seasoned mortgage loans respectively for the securitization pool. In addition, AMC reviewed 11 newly refinanced mortgage loans originated by Fay. For the seasoned loans, the regulatory compliance review consisted of a review of compliance with the federal Truth in Lending Act (TILA) as implemented by Regulation Z, the federal Real Estate Settlement Procedures Act (RESPA) as implemented by Regulation X, the disclosure requirements and prohibitions of Section 50(a)(6), Article XVI of the Texas Constitution, federal, state and local anti-predatory regulations, federal and state specific late charge and prepayment penalty regulations, and document review. For the newly issued loans, AMC also reviewed compliance with Dodd-Frank provisions implemented on October 3, 2015 and ATR/QM regulations.

AMC found that 1,711 out of 1,878 seasoned loans had compliance exceptions with 806 loans having rating agency C or D level exceptions. Recovco identified three loans with grade D exceptions in its review of 77 loans and AMC identified one loan with a grade C property valuation exception in its review of the 11 newly originated loans. Also, based on information provided by the seller, there were additional loans were dropped from the securitization due to compliance exceptions. The C or D level exceptions broadly fell into four categories: missing final HUD-1 settlement statements/HUD errors, Texas (TX50(a)(6)) cash-out loan violations, other state compliance exceptions (including North Carolina CHL Tangible Net Benefit violations), and missing documents or missing information.

We applied a small adjustment to our loss severities to account for the C or D level missing final HUD-1 settlement statement and HUD errors. For these types of issues, borrowers can raise legal claims in defense against foreclosure as a set off or recoupment and win damages that can reduce the amount of the foreclosure proceeds. Such damages can include up to $4,000 in statutory damages, borrowers' legal fees and other actual damages. We also applied small adjustments to loss severities for TX50(a)(6) violations, North Carolina CHL Tangible Net Benefit exceptions, and other state law compliance exceptions. We did not apply an adjustment for missing documents or missing information identified by the diligence provider in part because we separately received and assessed a title report and a custodial report for the mortgage loans in the pool.

AMC and Recovco reviewed the findings of various title search reports covering 798 and 77 mortgage loans respectively in the preliminary sample population in order to confirm the first lien position of the related mortgages. Overall, AMC's review confirmed that 780 mortgages were in first lien position. For the 18 remaining loans reviewed by AMC, proof of first lien position could only be confirmed using the final title policy as of loan origination. Recovco reported that all of the 77 mortgage loans reviewed were in first-lien position. Given the relatively clean title/lien results, we did not apply any adjustments based on the results of this review.

The seller, NRZ Sponsor IX LLC, is providing a representation and warranty for missing mortgage files. To the extent that the indenture trustee, master servicer, related servicer or depositor has actual knowledge of a defective or missing mortgage loan document or a breach of a representation or warranty regarding the completeness of the mortgage file or the accuracy of the mortgage loan documents, and such missing document, defect or breach is preventing or materially delaying the (a) realization against the related mortgaged property through foreclosure or similar loss mitigation activity or (b) processing of any title claim under the related title insurance policy, the party with such actual knowledge will give written notice of such breach, defect or missing document, as applicable, to the related seller, indenture trustee, depositor, master servicer and related servicer. Upon notification of a missing or defective mortgage loan file, the related seller will have 120 days from the date it receives such notification to deliver the missing document or otherwise cure the defect or breach. If it is unable to do so, the related seller will be obligated to replace or repurchase the mortgage loan.

We did not apply an adjustment for missing documents or missing information identified by AMC in part because we separately received and assessed a title report and a custodial report for the mortgage loans in the pool. We reviewed a draft of the custodial report and identified seven loans with note instrument issues. Even though this exception and the missing file exceptions noted in the compliance review are protected by the R&W framework, we assumed that 0.2% (seven out of 3,628) of the projected defaults will have missing document breaches that will not be effectively remedied and will result in higher loss severities. This adjustment is due in part to our view of the financial strength of the R&W provider.

Trustee, Custodian, Paying Agent, Servicers, Master Servicer, Successor Servicer and Special Servicer

The transaction indenture trustee is Wilmington Trust, National Association. The custodian functions will be performed by Wells Fargo Bank, N.A., The Bank of New York Mellon Trust Company, N.A., and U.S. Bank National Association. The paying agent and cash management functions will be performed by Citibank, N.A. In addition, Nationstar Mortgage, as master servicer, is responsible for servicer oversight, termination of servicers, and the appointment of successor servicers. Having Nationstar Mortgage as a master servicer mitigates servicing-related risk due to the performance oversight that it will provide. Nationstar Mortgage will serve as the designated successor servicer for the transaction and Shellpoint will serve as the special servicer. As the special servicer, Shellpoint will be responsible for servicing mortgage loans that become 60 or more days delinquent.

Nationstar Mortgage (58.7%), Ocwen (19.7%), Wells Fargo (9.6%), PNC Mortgage (6.3%), SLS (4.6%), Shellpoint (0.8%), and Fay (0.3%) will act as the primary servicers of the collateral pool. Ocwen Financial Corporation (the parent company of Ocwen) currently has a Corporate Family Rating is Caa1 with a negative outlook. Ocwen's ratings reflect the regulatory scrutiny the company is experiencing and the company's very weak profitability, largely due to the impact of high legal, regulatory and servicing expenses. In NRMLT 2018-2, the risk of Ocwen bankruptcy is mitigated by Nationstar Mortgage's role as master servicer and designated successor servicer.

Transaction Structure

The transaction cash flows follow a shifting interest structure that allows subordinated bonds to increasingly receive principal prepayments after an initial lock-out period of five years, provided two performance tests are met. To pass the first test, the delinquent and recently modified loan balance cannot exceed 50% of the subordinate bonds outstanding. To pass the second test, cumulative losses cannot exceed certain thresholds that gradually increase over time.

Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool shrinks, senior bonds are exposed to tail risk, i.e., risk of back-ended losses when fewer loans remain in the pool. The transaction provides for a subordination floor that helps to reduce this tail risk. Specifically, the subordination floor prevents subordinate bonds from receiving any principal if the amount of subordinate bonds outstanding falls below 6.25% of the closing principal balance. There is also a provision that prevents subordinate bonds from receiving principal if the credit enhancement for the Class A-1 Note falls below its percentage at closing, 25.00%. These provisions mitigate tail risk by protecting the senior bonds from eroding credit enhancement over time.

Other Considerations

The transaction contains a mortgage loan sale provision, the exercise of which is subject to potential conflicts of interest. The servicers in the transaction may sell mortgage loans that become 60 or more days delinquent according to the MBA methodology to any party in the secondary market in an arms-length transaction and at a fair market value. For such sale to take place, the servicer must determine, in its reasonable commercial judgment, that such sale would maximize proceeds on a present value basis. If the sponsor or any of its subsidiaries is the purchaser, the servicers must obtain at least two additional independent bids. The transaction documents provide little detail on the method of receipt of bids and there is no set minimum sale price. Such lack of detail creates a risk that the independent bids could be weak bids from purchasers that do not actively participate in the market. Furthermore, the transaction documents provide little detail regarding how servicers should conduct present value calculations when determining if a note sale should be pursued. The two largest servicers in the transaction, Nationstar Mortgage and Ocwen, have commercial relationships with the sponsor outside of the transaction and the special servicer, Shellpoint, is an affiliate of the sponsor. These business arrangements could lead to conflicts of interest. We took this into account and adjusted our losses accordingly.

When analyzing the transaction, we reviewed the transaction's exposure to large potential indemnification payments owed to transaction parties due to potential lawsuits. In particular, we assessed the risk that the indenture trustee would be subject to lawsuits from investors for a failure to adequately enforce the R&Ws against the seller. We believe that NRMLT 2018-2 is adequately protected against such risk primarily because nearly all of the loans in this transaction are more than 10 years seasoned and the weighted average seasoning is approximately 14 years. Although some loans in the pool were previously delinquent and modified, the loans all have a substantial history of payment performance. This includes payment performance during the recent recession. As such, if loans in the pool were materially defective, such issues would likely have been discovered prior to the securitization. Furthermore, third party due diligence was conducted on a significant random sample of the loans for issues such as data integrity, compliance, and title. As such, we did not apply adjustments in this transaction to account for indemnification payment risk.

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 our 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. Other reasons for better-than-expected performance include changes to servicing practices that enhance collections or refinancing opportunities that result in prepayments.

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 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.

The methodologies used in these ratings were "Moody's Approach to Rating Securitisations Backed by Non-Performing and Re-Performing Loans" published in August 2016 and "US RMBS Surveillance Methodology" published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

For further details on the transaction, please check Moody's pre-sale report for this transaction.

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_1121953.

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.

In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.

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 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.

Khakan Haider
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

Yehudah Forster
Senior Vice President
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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