VERUS INTERNATIONAL, INC.
Fitch Ratings has assigned expected ratings to the residential mortgage-backed notes issued by
RATING ACTIONS
Entity / Debt
Rating
A1
LT
Expected Rating
A2
LT
AA+(EXP)sf
Expected Rating
A3
LT
A-(EXP)sf
Expected Rating
M1
LT
NR(EXP)sf
Expected Rating
B1
LT
NR(EXP)sf
Expected Rating
B2
LT
NR(EXP)sf
Expected Rating
B3
LT
NR(EXP)sf
Expected Rating
XS
LT
NR(EXP)sf
Expected Rating
LT
NR(EXP)sf
Expected Rating
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VIEW ADDITIONAL RATING DETAILS
Transaction Summary
Fitch expects to rate the residential mortgage-backed notes to be issued by
The notes are secured by mortgage loans originated by various originators and acquired by the sellers.
Distributions of P&I and loss allocations are based on a modified sequential-payment structure. The transaction has a stop advance feature for first-lien loans where the P&I advancing party will advance delinquent P&I for up to 90 days. There is no servicer advancing for second-lien loans.
KEY RATING DRIVERS
Updated Sustainable Home Prices (Negative): Due to its updated view on sustainable home prices, Fitch views the home price values of this pool as 8.9% above a long-term sustainable level (versus 9.4% on a national level as of 2Q23, up 1.8% since 4Q23). Housing affordability is the worst it has been in decades driven by both high interest rates and elevated home prices. Home prices have increased 4.7% yoy nationally as of
Nonprime Credit Quality (Mixed): The collateral consists of five- and seven-year hybrid adjustable-rate loans and fixed-rate loans ranging between 10 and 40 years. Adjustable-rate loans represent 28.2% of the pool as calculated by Fitch, which includes 18.9% investor loans with a default interest rate feature. Of the loans, 10.1% are interest-only (IO) loans and the remaining 71.8% are fully amortizing loans. The pool is seasoned at approximately four months in aggregate, as calculated by Fitch. Borrowers in this pool have a relatively strong credit profile with a 733 weighted average (WA) model FICO as calculated by Fitch, a 45.2% model debt-to-income ratio (DTI) as calculated by Fitch and moderate leverage comprising a 77.9% sLTV.
Of the loans in the pool, 32.0% are designated as nonqualified mortgage (non-QM), 14.5% are designated as Safe-Harbor QM (SHQM), 8.2% are designated as rebuttable presumption and the remaining 45.2% are investment properties not subject to the Ability-to-Repay (ATR) Rule. One consumer investor loan was subject to the ATR rule and was included in the non-QM percentage.
Approximately 0.4% of the loans have experienced a delinquency within the past 24 months and there are no loans in the pool that are currently delinquent as calculated by Fitch; 2.8% of the loans in the pool were underwritten to foreign national borrowers. The pool characteristics resemble recent nonprime collateral; therefore, the pool was analyzed using Fitch's nonprime model.
Alternative Documentation Loans (Negative): For approximately 95.2% of the loans, alternative documentation was used to underwrite the loans. Of these loans, 37.2% were underwritten to a bank statement program to verify income, which is not consistent with Fitch's view of a full documentation program. To reflect the additional risk, Fitch increases the probability of default (PD) by 1.5x on the bank statement loans. Besides loans underwritten to a bank statement program, 29.0% are a debt service coverage ratio (DSCR) product, 5.5% are a written verification of employment (WVOE) product, 18.2% are P&L loans, 1.4% is a 1099 product and 1.5% comprise an asset depletion product.
Second-Lien Percentage (Negative): Approximately 4.6% of the pool are secured by second-lien loans. Fitch treats second-lien loans as 100% loss severity. Losses for second-lien loans at '
Modified Sequential-Payment Structure with Limited Advancing (Mixed): The structure differs from the previous
The structure distributes principal pro rata among the senior notes while locking out the subordinate classes from principal payments until the senior classes are paid off. If a delinquency trigger event or a cumulative loss trigger event occurs in a given period, principal will be distributed sequentially to class A-1, A-2 and A-3 notes until each class balance is reduced to zero.
The structure includes a step-up coupon feature where the fixed interest rate for classes A-1, A-2 and A-3 will increase by 100bps beginning with the Accrual Period in
Advances of delinquent P&I will be made on the first-lien mortgage loans for the first 90 days of delinquency to the extent such advances are deemed recoverable. There is no servicer advancing for the second-lien loans. If the P&I advancing parties fail to make required advances, the master servicer,
The stop advance feature limits the external liquidity to the notes in the event of large and extended delinquencies; however, the loan-level loss severities (LS) are less for this transaction than for those where the servicer is obligated to advance P&I for the life of the transaction, as P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust.
As a sensitivity to Fitch's rating stresses, Fitch took into account a WA coupon (WAC) deterioration that varied by rating stress. The WAC cut was derived by assuming a 2.5% cut (based on the most common historical modification rate) on 40% (historical Alt-A modification percentage) of the performing loans. Although the WAC reduction stress is based on historical modification rates, Fitch did not include the WAC reduction stress in its testing of the delinquency trigger.
Fitch viewed the WAC deterioration as more of a pre-emptive cut given the ongoing macroeconomic and regulatory environment. A portion of borrowers will likely be impaired but will not ultimately default due to modifications and reduced P&I. Furthermore, this approach had the largest impact on the back-loaded benchmark scenario.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
The defined negative rating sensitivity analysis demonstrates how the ratings would react to steeper market value declines (MVDs) at the national level. The analysis assumes MVDs of 10.0%, 20.0% and 30.0% in addition to the model projected 40.8% at '
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
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 being assigned ratings of 'AAAsf'.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Third-party due diligence was performed on 100% of loans in the transaction by
Three loans received a final grade of 'C', all of which were due to compliance and property valuation exceptions related mostly to non-material TRID and appraisal issues. Overall, the model credit for the high percentage of loan-level due diligence combined with adjustments for loan exceptions reduced the 'AAAsf' loss expectation by 51bps.
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'.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Additional information is available on www.fitchratings.com
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