Fitch Ratings has assigned expected ratings to
Entity / Debt
VIEW ADDITIONAL RATING DETAILS
Fitch expects to rate the RMBS to be issued by
The certificates are secured by mortgage loans mainly originated by
There is Libor exposure in this transaction, as there are three ARM loans that reference Libor, although the bonds do not have Libor exposure. Class A-1, A-2 and A-3 certificates are fixed rate, capped at the net weighted average coupon (WAC), and have a step-up feature. Class M-1, B-1 and B-3 certificates are based on the net WAC; class B-2 certificates are based on the net WAC but have a stepdown feature whereby the class becomes a principal-only bond at the point the class A-1, A-2 and A-3 step-up coupons take place. In addition, at the point the class A-1, A-2, and A-3 step-up coupons take place, the waterfall will prioritize the payment to the A-1, A-2, and/or A-3 cap carryover amounts prior to paying B-3.
KEY RATING DRIVERS
Updated Sustainable Home Prices (Negative): Due to Fitch’s updated view on sustainable home prices, Fitch views the home price values of this pool as 8.1% above a long-term sustainable level (vs. 10.5% on a national level as of
Non-QM Credit Quality (Mixed): The collateral consists of 1,073 loans totaling
The borrowers have a strong credit profile (736 FICO and 40.3% debt-to-income (DTI) ratio, as determined by Fitch), along with relatively moderate leverage, with an original combined loan to value (CLTV) ratio of 71.2%, as determined by Fitch, which translates to a Fitch-calculated sustainable LTV (sLTV) of 71.5%.
Of the pool, 65.8% represents loans whereby the borrower maintains a primary or secondary residence, while the remaining 34.2% comprises investor properties based on Fitch’s analysis. Fitch determined that 18.4% of the loans were originated through a retail channel.
Additionally, 67.4% are designated as non-QM, while the remaining 32.6% are exempt from QM status since they are investor loans.
The pool contains 128 loans over
Loans on investor properties (11.0% underwritten to the borrower’s credit profile and 23.2% comprising investor cash flow and no ratio loans) represent 34.2% of the pool, as determined by Fitch. There are no second lien loans, and 2.1% of the borrowers were viewed by Fitch as having a prior credit event in the past seven years. Per the transaction documents, two of the loans have subordinate financing. In Fitch’s analysis, Fitch also considered loans with deferred balances to have subordinate financing. In this transaction, there were no loans with deferred balances; therefore, Fitch performed its analysis considering two of the loans to have subordinate financing.
Fitch determined that 37 of the loans in the pool are to foreign nationals. Fitch treats loans to foreign nationals as investor occupied, coded as ASF1 (no documentation) for employment and income documentation and removed the liquid reserves. If a credit score is not available, Fitch uses a credit score of 650 for these borrowers.
Of the loans in the pool, 38 are agency-eligible loans underwritten to DU/LP with an ‘Approved/Eligible’ status.
Although the borrowers’ credit quality is higher than that of AOMT transactions securitized in 2022 and 2021, the pool’s characteristics resemble those of nonprime collateral, and, therefore, the pool was analyzed using Fitch’s nonprime model.
Geographic Concentration (Negative): The largest concentration of loans is in
Loan Documentation (Negative): Fitch determined that 89.7% of the loans in the pool were underwritten to borrowers with less than full documentation. Per the transaction documents, 90.5% of the loans in the pool were underwritten to borrowers with less than full documentation. Fitch may consider a loan to be less than a full documentation loan based on its review of the loan program and the documentation details provided in the loan tape, which may explain any discrepancy between Fitch’s percentage and the transaction documents.
Of the loans underwritten to borrowers with less than full documentation, Fitch determined that 59.4% were underwritten to a 12-month or 24-month business or personal bank statement program for verifying income, which is not consistent with Appendix Q standards and Fitch’s view of a full documentation program. To reflect the additional risk, Fitch increases the probability of default (PD) by 1.5x on bank statement loans. In addition to loans underwritten to a bank statement program, 23.1% comprise a debt service coverage ratio (DSCR) product, 0.1% comprise a no ratio product, 1.2% are an asset depletion product and 3.4% are third party-prepared 12 month-24 month P&L statements, with some of these loans having two months of bank statements for additional documentation.
Three loans in the pool are no ratio DSCR loans; for these loans, employment and income were considered to be no documentation in Fitch’s analysis; as such, Fitch assumed a DTI ratio of 100%. This is in addition to the loans being treated as investor occupied.
Limited Advancing (Mixed): The deal is structured to six months of servicer advances for delinquent P&I. The limited advancing reduces loss severities, as a lower amount is repaid to the servicer when a loan liquidates and liquidation proceeds are prioritized to cover principal repayment over accrued but unpaid interest. The downside is the additional stress on the structure, as liquidity is limited in the event of large and extended delinquencies.
The ultimate advancing party in the transaction is the master servicer,
Modified Sequential Payment Structure (Neutral): The structure distributes collected principal pro rata among the class A certificates while excluding the subordinate bonds from principal until all three A classes are reduced to zero. To the extent that either a cumulative loss trigger event or a delinquency trigger event occurs in a given period, principal will be distributed sequentially to class A-1, A-2 and A-3 bonds until they are reduced to zero.
There is excess spread in the transaction available to reimburse for losses or interest shortfalls should they occur. However, excess spread will be reduced on and after
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at the MSA level. Sensitivity analyses was conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.
This defined negative rating sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10.0%, 20.0% and 30.0% in addition to the model-projected 40.3% at ‘AAAsf’. The analysis indicates that there is some potential rating migration with higher MVDs for all rated classes, compared with the model projection. Specifically, a 10% additional decline in home prices would lower all rated classes by one full category
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper MVDs than assumed at the MSA level. Sensitivity analyses was conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.
This defined positive rating sensitivity analysis demonstrates how the ratings would react to positive home price growth of 10% with no assumed overvaluation. Excluding the senior class, which is already rated ‘AAAsf’, the analysis indicates there is potential positive rating migration for all of the rated classes. Specifically, a 10% gain in home prices would result in a full category upgrade for the rated class excluding those being assigned ratings of ‘AAAsf’.
This section provides insight into the model-implied sensitivities the transaction faces when one assumption is modified, while holding others equal. The modeling process uses the modification of these variables to reflect asset performance in up and down environments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. It should not be used as an indicator of possible future performance.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAAsf’ to ‘Dsf’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by
Fitch relied on an independent third-party due diligence review performed on 100% of the loans. The third-party due diligence was consistent with Fitch’s ‘
An exception and waiver report was provided to Fitch, indicating the pool of reviewed loans has a number of exceptions and waivers. Fitch determined that the exceptions and waivers do not materially affect the overall credit risk of the loans due to the presence of compensating factors such as having liquid reserves or FICO above guideline requirements or LTV or DTI lower than guideline requirement. Therefore, no adjustments were needed to compensate for these occurrences.
Fitch also utilized data files that were made available by the issuer on its SEC Rule 17g-5 designated website. The loan-level information Fitch received was provided in the
The ASF data tape layout was established with input from various industry participants, including rating agencies, issuers, originators, investors and others, to produce an industry standard for the pool-level data in support of the
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction’s representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled ‘Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions’.
AOMT 2023-1 has an ESG Relevance Score of ‘4’ (+) for Transaction Parties & Operational Risk due to strong due diligence results on 100% of the pool and a ‘RPS1-‘ Fitch-rated servicer, which has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com