KBRA Assigns Preliminary Ratings to Ellington Financial Mortgage Trust 2020-1 (EFMT 2020-1)

Kroll Bond Rating Agency, Inc. (KBRA) assigns preliminary ratings to three classes of mortgage-backed notes from Ellington Financial Mortgage Trust 2020-1 (EFMT 2020-1), a $259.3 million non-prime RMBS transaction.

EFMT 2020-1 contains non-prime, mostly non-QM collateral, with a meaningful percentage of loans (8.4% by balance) in active forbearance plans due to the COVID-19 crisis at the time of the analysis. KBRA made a number of adjustments to its expected losses and cash flow modeling scenarios, including assumptions for an increase in forbearance and delinquency in the short term, increased default risk for forbearance loans notwithstanding current payment status, reductions in credit to excess spread, and front-loaded home price decline timing projections.

The underlying collateral in EFMT 2020-1 is comprised of 648 residential mortgages, and is characterized by moderate borrower leverage and a notable concentration of alternative income documentation, with 44.8% of the loans underwritten using < 12 month, 12 month, or 24-month bank statements. Ellington has purchased all but 24 loans in the pool from its affiliated originator LendSure Mortgage Corp. (LendSure).

Approximately 75.2% of the loans were categorized as non-qualified mortgages (Non-QM). The remaining loans (24.8%) were categorized as being exempt from the ATR/QM rule having been originated for a business purpose (i.e. investment properties). EFMT 2020-1 also includes loans originated to borrowers with prior credit events (6.9%) and foreign national borrowers (8.5%), where at least one borrower was a foreign national or non-permanent resident alien.

The pool has a non-zero weighted average (NZWA) original credit score of 712 and a WA debt-to-income (DTI) ratio of 36.7%. Borrowers in EFMT 2020-1 exhibit considerable equity in each mortgaged property, as evidenced by the WA original loan-to-value (LTV) and combined LTV (CLTV) ratios each at 69.7%. The pool has a WA loan age (WALA) of approximately four months, and it includes both fixed rate mortgages (FRMs, 37.5%) and hybrid adjustable rate mortgages (ARMs, 62.5%). Most of the FRMs possess 30-year terms (34.1%), while the pool’s ARM loans include initial fixed rate periods of five (1.0%), and seven (61.5%) years. Approximately 14.7% of the mortgages have an interest-only period, most of which last for the first five or seven years of the loan term.

KBRA’s rating approach incorporated loan-level analysis of the mortgage pool through its Residential Mortgage Default and Loss Model, an examination of the results from third-party loan file due diligence, cash flow modeling, analysis of the transaction’s payment structure, reviews of key transaction parties and an assessment of the transaction’s legal structure and documentation. This analysis is further described in our U.S. RMBS Rating Methodology.

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Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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Contacts

Analytical Contacts

Edward DeVito, Managing Director (Lead Analyst)
+1 (646) 731-2319
edevito@kbra.com

Jeremy Kugelman, Associate
+1 (646) 731-1228
jkugelman@kbra.com

Hannah Brennan, Analyst
+1 (646) 731-3324
hbrennan@kbra.com

Jack Kahan, Senior Managing Director (Rating Committee Chair)
+1 (646) 731-2486
jkahan@kbra.com

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