DBRS, Inc. (DBRS Morningstar) finalized its following provisional ratings on the Mortgage Pass-Through Certificates, Series 2023-DSC2 (the Certificates) to be issued by J.P. Morgan Mortgage Trust 2023-DSC2 (JPMMT 2023-DSC2):
— $201.2 million Class A-1 at AAA (sf)
— $201.2 million Class A-1-A at AAA (sf)
— $201.2 million Class A-1-A-X at AAA (sf)
— $201.2 million Class A-1-B at AAA (sf)
— $201.2 million Class A-1-B-X at AAA (sf)
— $201.2 million Class A-1-C at AAA (sf)
— $201.2 million Class A-1-C-X at AAA (sf)
— $32.0 million Class A-2 at AA (high) (sf)
— $32.0 million Class A-2-A at AA (high) (sf)
— $32.0 million Class A-2-A-X at AA (high) (sf)
— $32.0 million Class A-2-B at AA (high) (sf)
— $32.0 million Class A-2-B-X at AA (high) (sf)
— $32.0 million Class A-2-C at AA (high) (sf)
— $32.0 million Class A-2-C-X at AA (high) (sf)
— $34.5 million Class A-3 at A (sf)
— $34.5 million Class A-3-A at A (sf)
— $34.5 million Class A-3-A-X at A (sf)
— $34.5 million Class A-3-B at A (sf)
— $34.5 million Class A-3-B-X at A (sf)
— $34.5 million Class A-3-C at A (sf)
— $34.5 million Class A-3-C-X at A (sf)
— $14.8 million Class M-1 at BBB (low) (sf)
— $10.8 million Class B-1 at BB (low) (sf)
— $7.9 million Class B-2 at B (low) (sf)
Classes A-1-A-X, A-1-B-X, A-1-C-X, A-2-A-X, A-2-B-X, A-2-C-X, A-3-A-X, A-3-B-X, and A-3-C-X are interest-only(IO) exchangeable certificates. The class balances represent notional amounts.
Classes A-1-A, A-1-B, A-1-C, A-2-A, A-2-B, A-2-C, A-3-A, A-3-B, and A-3-C are also exchangeable certificates.
The exchangeable classes can be exchanged for combinations of depositable certificates as specified in the offering documents.
The AAA (sf) ratings on the Certificates reflect 34.70% of credit enhancement provided by subordinated certificates. The AA (high) (sf), A (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) ratings reflect 24.30%, 13.10%, 8.30%, 4.80%, and 2.25% of credit enhancement, respectively.
Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.
This transaction is a securitization of a portfolio of fixed- and adjustable-rate, investor debt service coverage ratio (DSCR; 92.0%) and conventional (8%), first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 950 mortgage loans (representing 1,546 properties) with a total principal balance of $308,148,236 as of the Cut-Off Date (August 1, 2023).
JPMMT 2023-DSC2 represents the third securitization issued from the JPMMT-DSC shelf (the first of such rated by DBRS Morningstar), which is generally backed by business-purpose investment property loans primarily underwritten using DSCR. J.P. Morgan Mortgage Acquisition Corp. (JPMMAC) serves as the Sponsor of this transaction.
The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and predominantly the DSCR, where applicable. Since the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) rules and the TILA/RESPA Integrated Disclosure rule.
JPMMAC, acquired (or in advance of closing, will have acquired) the loans directly from originators, or in other cases certain third-party initial aggregators (B4 Residential Mortgage Trust, Series I, B4 Residential Mortgage Trust, Series IV, (together, B4), MAXEX Clearing LLC (MAXEX) ,and Oceanview Dispositions, LLC (Oceanview) that directly or indirectly acquired other mortgage loans. On the closing date, JPMMAC will sell all of its interest in the mortgage loans to the depositor. Various originators, each generally comprising less than 15% of the pool (except LendingOne LLC with 17.7%), originated the loans. As further detailed in this report, DBRS Morningstar did not perform individual originator reviews for the purpose of evaluating the mortgage pool.
The Sponsor, or a majority-owned affiliate, will retain an eligible vertical interest representing at least 5% of the aggregate fair value of the Certificates, other than the Class A-R Certificates, to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.
On any date following the date on which the aggregate unpaid principal balance (UPB) of the mortgage loans is less than or equal to 10% of the Cut-Off Date balance, the Optional Clean-Up Call Holder will have the option to terminate the transaction by directing the Master Servicer to purchase all of the mortgage loans and any real estate owned (REO) property from the Issuer at a price equal to the sum of the aggregate UPB of the mortgage loans (other than any REO property) plus accrued interest thereon, the lesser of the fair market value of any REO property and the stated principal balance of the related loan, and any outstanding and unreimbursed servicing advances, accrued and unpaid fees, any non-interest-bearing deferred amounts, and expenses that are payable or reimbursable to the transaction parties.
Of note, the representations and warranty (R&W) framework of this transaction, while still containing certain weaknesses, does utilize certain features more closely aligned with post-crisis prime transactions, such as automatic reviews at 120-day delinquency and the use of an independent third party R&W reviewer. For this, and other reasons as further detailed in Representations and Warranties section of the rating report, this framework is perceived as stronger than that of a typical Non-QM/DSCR transaction..
NewRez LLC d/b/a Shellpoint Mortgage Servicing will act as the Servicer for all of the loans following the servicing transfer date. Shellpoint currently services 44.9% of the pool. Prior to the servicing transfer date, Fay and Selene service 44.6% and 10.5% of the pool, respectively, as Interim Servicers. Computershare Trust Company, N.A. (rated BBB with a Stable trend by DBRS Morningstar) will act as the Paying Agent, Certificate Registrar, and Custodian.
For this transaction, the Servicer will fund advances of delinquent principal and interest (P&I) until loans become 120 days delinquent or are otherwise deemed unrecoverable. Additionally, the Servicer is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances). If the Servicer fails in its obligation to advance, the Master Servicer is obligated to make such advance to the extent it deems the advance recoverable. If the Master Servicer fails in its obligation to advance, the Securities Administrator is obligated to make such advance to the extent it deems the advance recoverable.
The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior classes (Classes A-1, A-2, and A-3) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). Prior to a Trigger Event, principal proceeds can be used to cover interest shortfalls on Classes A-1, A-2, and A-3 before being applied to amortize the balances of the Certificates. After a Trigger Event, principal proceeds can be used to cover interest shortfalls on Classes A-1 and A-2 sequentially (IIPP). For the more subordinate Certificates, principal proceeds can be used to cover interest shortfalls as the more senior Certificates are paid in full.
Excess spread, if available, can be used to cover (1) realized losses and (2) cumulative applied realized loss amounts preceding the allocation of funds to unpaid Cap Carryover Amounts due to Classes A-1 down to A-3. Interest and principal otherwise payable to Class B-3 interest and principal may be used to pay the Cap Carryover Amounts.
The rating reflects transactional strengths that include the following:
— Improved underwriting standards;
— Certain loan attributes;
— Robust pool composition;
— Satisfactory third-party due-diligence review; and
— 100% of the loans are current by MBA definition.
The transaction also includes the following challenges:
— 100% investor loans;
— Four-month servicer advances of delinquent P&I; and
— Representations and warranties framework.
The full description of the strengths, challenges, and mitigating factors are detailed in the related report.
DBRS Morningstar’s credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the rated Certificates are the Interest Distribution Amount, Interest Carryforward Amount, and the Class Principal Amount.
DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, in this transaction, DBRS Morningstar’s ratings do not address the payment of any Cap Carryover Amount based on its position in the cash flow waterfall.
DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology applicable to the credit ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 9, 2023; https://www.dbrsmorningstar.com/research/418987).
Other methodologies referenced in this transaction are listed at the end of this press release.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
— Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (April 28, 2023; https://www.dbrsmorningstar.com/research/413297)
— Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)
— Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020; https://www.dbrsmorningstar.com/research/366613)
— Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023; https://www.dbrsmorningstar.com/research/414076)
— Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)
— Operational Risk Assessment for U.S. RMBS Originators (July 17, 2023; https://www.dbrsmorningstar.com/research/417275)
— Operational Risk Assessment for U.S. RMBS Servicers (July 17, 2023; https://www.dbrsmorningstar.com/research/417276)
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].