Fitch Ratings has assigned final ratings to the residential mortgage-backed certificates to be issued by Spruce Hill 2022-
RATING ACTIONS
Entity / Debt
Rating
Prior
Spruce Hill 2022-SH1
A1A
LT
AAAsf
New Rating
A1B
LT
AAAsf
New Rating
A2
LT
AAsf
New Rating
AA(EXP)sf
A3
LT
Asf
New Rating
A(EXP)sf
M1
LT
BBBsf
New Rating
BBB(EXP)sf
B1
LT
BBsf
New Rating
BB(EXP)sf
B2
LT
Bsf
New Rating
B(EXP)sf
B3
LT
NRsf
New Rating
NR(EXP)sf
XS
LT
NRsf
New Rating
NR(EXP)sf
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
The certificates are supported by 622 nonprime loans with a total balance of approximately
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 12.6% above a long-term sustainable level (versus 12.2% on a national level as of
Non-QM Credit Quality (Negative): The collateral consists of 622 loans, totaling
Fitch's expected loss in the 'AAAsf' stress is 20.75%. This is mostly driven by the non-QM collateral and the significant investor cash flow product concentration.
Loan Documentation (Negative): Approximately 88% of the loans in the pool were underwritten to less than full documentation and 45% were underwritten to a bank statement program for verifying income, which is not consistent with Appendix Q standards and Fitch's view of a full documentation program. A key distinction between this pool and legacy Alt-A loans is that these loans adhere to underwriting and documentation standards required under the
Fitch's treatment of alternative loan documentation increased the 'AAAsf' expected loss by 650 bps relative to a fully documented loan.
High Percentage of DSCR Loans (Negative): There are 331 debt service coverage ratio (DSCR) products in the pool (53% by loan count). These business purpose loans are available to real estate investors that are qualified on a cash flow basis, rather than DTI, and borrower income and employment are not verified. Compared to standard investment properties, for DSCR loans, Fitch converts the DSCR values to a DTI and treats as low documentation.
Fitch's expected loss for these loans is 27.0% in the 'AAAsf' stress, which is driving the higher pool expected losses due to the 42% weighted average (WA) concentration.
Modified Sequential-Payment Structure with Limited Advancing (Mixed):
The structure distributes principal pro rata among the senior certificates while shutting out the subordinate bonds from principal until all senior classes are reduced to zero. If a cumulative loss trigger event or delinquency trigger event occurs in a given period, principal will be distributed sequentially to class A-1A, A-1B, A-2 and A-3 certificates until they are reduced to zero. Advances of delinquent P&I will be made on the mortgage loans for the first 90 days of delinquency, to the extent such advances are deemed recoverable. If the P&I advancing party fails to make a required advance, the master servicer and then securities administrator will be obligated to make such advance.
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 to this is the additional stress on the structure, as there is limited liquidity in the event of large and extended delinquencies.
Spruce Hill 2022-SH1 has a step-up coupon for the senior classes (A-1A, A-1B, A-2 and A-3). After four years, the senior classes pay the lesser of a 100-bp increase to the fixed coupon or the net WA coupon (WAC) rate. Fitch expects the senior classes to be capped by the net WAC. Additionally, after the step-up date, the B-1 and B-2 classes will become PO classes. The unrated class B-3 interest allocation goes toward the senior cap carryover amount for as long as the senior classes are outstanding. The cashflow impact to the subordinate classes increases the P&I allocation for the senior classes after the step-up date as long as the subordinate classes are not written down.
Ultimate Advancing Party Fails to Meet Counterparty Criteria (Negative): The ultimate advancing party in the transaction is the master servicer,
Fitch believes that as a liquidity provider,
RATING SENSITIVITIES
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 analysis was conducted at the state and national level to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.
The 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 43.2% at '
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 analysis was conducted at the state and national level to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.
The 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 assigned 'AAAsf' ratings.
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.
SUMMARY OF FINANCIAL ADJUSTMENTS
International scale credit ratings for 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 AMC and Consolidated Analytics. The third-party due diligence described in Form 15E focused on credit, compliance and property valuation review. Fitch considered this information in its analysis and, as a result, Fitch made the following adjustment to its analysis: a 5% credit at the loan level for each loan where satisfactory due diligence was completed. This adjustment resulted in a 45bps reduction to the 'AAAsf' expected loss.
DATA ADEQUACY
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
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
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'.
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'.
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'.
ESG Considerations
Spruce Hill 2022-SH1 has an ESG Relevance Score of '4' for Governance due to transaction parties and operational risk, which has a negative 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
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