New Residential Mortgage Loan Trust 2022-SFR1

Rating Action: Moody’s assigns definitive ratings to New Residential Mortgage Loan Trust 2022-SFR1Global Credit Research – 28 Jan 2022New York, January 28, 2022 — Moody’s Investors Service (“Moody’s”) has assigned definitive ratings to four classes of certificates backed by one fixed-rate loan secured by mortgages on 1,200 single-family rental properties owned by New Residential Mortgage Loan Trust 2022-SFR1 (NRMLT 2022-SFR1) securitization. The properties were acquired by affiliates of New Residential Investment Corp. (NRZ), the loan sponsor, between August 2019 and September 2021.The complete rating action is as follows:Issuer: New Residential Mortgage Loan Trust 2022-SFR1Cl. A, Definitive Rating Assigned Aaa (sf)Cl. B, Definitive Rating Assigned Aa3 (sf)Cl. C, Definitive Rating Assigned A3 (sf)Cl. D, Definitive Rating Assigned Baa3 (sf)RATINGS RATIONALEOverviewThe advance rate for this transaction at stresses consistent with a Aaa rating level is 26.75%. Moody’s uses the advance rate to determine whether the asset value is sufficient to support a targeted rating level given the size of the transaction’s liabilities.Key Transaction FeaturesLeverage: The loan’s leverage is high, which could reduce the sponsor’s incentives to maintain the properties in good condition in a stressed economic environment. The total leverage of 95.00% in NRMLT 2022-SFR1 is in line with FRTKL 2021-SFR1 at 95.0% and lower than Progress 2021-SFR11 at 99.5%. The corresponding Moody’s LTV is 115.5%, compared to FRTKL 2021-SFR1 at 118.5% and Progress 2021-SFR11 at 124.4%. We reduced our stressed recoveries to account for Moody’s LTV exceeding 100%. The loan sponsor, NRZ, will retain 5% of the initial certificate balance of each class of the certificates to satisfy risk retention obligations.Excess Collateral Release: Similar to recent SFR transactions, this deal will include an Excess Collateral Release (ECR) feature whereby the sponsor can remove properties without prepaying the loan balance, or paying yield maintenance or a release premium to the trust. The ECR will be subject to rating agency confirmation, or RAC, that the ratings will not be withdrawn or downgraded as a result of the exercise of such feature. The ECR will also have to satisfy certain LTV ratio requirement as well as geographic diversity and rents and cash flow tests.Voluntary Substitution: The securitization allows for up to 5% voluntary substitution (by property count) over the life of the transaction. The total property substitution can be increased up to a maximum of 35.0% subject to certain conditions. Any substitution over 5% is subject to receipt of a no downgrade confirmation (a rating agency condition, or RAC). At the time of a RAC request, we would likely consider, among other things, the credit profile of the updated pool, including geographic concentrations, and third party reviews of the substitute properties. Our recovery analysis takes into account the risk of increased geographic concentration because of voluntary substitution and limited third-party review scope on substituted properties.Alignment of Interest: In typical SFR transactions, the property manager is usually an affiliate of the sponsor. In contrast, in this transaction, the sponsor delegates the day-to-day management of the properties in the pool to an external third-party property manager, RENU Property Mgt LLC (RENU), who is also providing property management services for other SFR property owners. The alignment of interest risk is partially mitigated because of the arrangement between RENU and NRZ. RENU and NRZ are aligned through a Make Whole Agreement (MWA). The MWA compares the portfolio actual performance versus the underwriting assumptions from RENU. In case the portfolio actual yield exceeds the targeted yield, RENU will earn an additional fee. On the other hand, if the portfolio actual yield is below the targeted yield, RENU will make NRZ whole so that NRZ will achieve its underwritten cap rate. This arrangement strengthens the sponsor/management arrangement in this transaction because it incentivizes the property manager to effectively manage the portfolio.Enhanced structural features: The transaction structure has a multi-tier DSCR test and a payment-in-kind (PIK) feature for classes F, G, H, and I. Similar to Progress 2021-SFR11, the PIKable certificates can receive partial interest payment even before the multi-tier DSCR test kicks in. In our opinion, this structure is slightly credit negative because in several scenarios, available funds in the cash collateral can be lower than prior transactions. In an event of default, funds in this account can act as additional credit enhancement to the certificates. Our advance rates reflect a small adjustment for this feature.Payment Priority: On each monthly payment date, except during a loan event of default, funds in the cash management account will be applied sequentially to the security deposit account, tax account, and insurance account as necessary in order to make required payments, then to the lender, funds sufficient to pay the monthly debt service coverage which will be used to pay interest due on class A through class E-2 sequentially, and, if funds are available, to pay the class F up to the lesser of its coupon…ReadMore…