DBRS Assigns Provisional Ratings to Galton Funding Mortgage Trust 2018-2

DBRS, Inc. (DBRS) assigned the following provisional ratings to the Mortgage Pass-Through Certificates, Series 2018-2 (the Certificates) to be issued by Galton Funding Mortgage Trust 2018-2 (GFMT 2018-2):

-- $411.5 million Class A11 at AA (high) (sf)
-- $411.5 million Class AX11 at AA (high) (sf)
-- $411.5 million Class A12 at AA (high) (sf)
-- $411.5 million Class AX12 at AA (high) (sf)
-- $411.5 million Class A13 at AA (high) (sf)
-- $411.5 million Class AX13 at AA (high) (sf)
-- $362.1 million Class A21 at AAA (sf)
-- $362.1 million Class AX21 at AAA (sf)
-- $362.1 million Class A22 at AAA (sf)
-- $362.1 million Class AX22 at AAA (sf)
-- $362.1 million Class A23 at AAA (sf)
-- $362.1 million Class AX23 at AAA (sf)
-- $49.3 million Class A31 at AA (high) (sf)
-- $49.3 million Class AX31 at AA (high) (sf)
-- $49.3 million Class A32 at AA (high) (sf)
-- $49.3 million Class AX32 at AA (high) (sf)
-- $49.3 million Class A33 at AA (high) (sf)
-- $49.3 million Class AX33 at AA (high) (sf)
-- $289.7 million Class A41 at AAA (sf)
-- $289.7 million Class AX41 at AAA (sf)
-- $289.7 million Class A42 at AAA (sf)
-- $289.7 million Class AX42 at AAA (sf)
-- $289.7 million Class A43 at AAA (sf)
-- $289.7 million Class AX43 at AAA (sf)
-- $72.4 million Class A51 at AAA (sf)
-- $72.4 million Class AX51 at AAA (sf)
-- $72.4 million Class A52 at AAA (sf)
-- $72.4 million Class AX52 at AAA (sf)
-- $72.4 million Class A53 at AAA (sf)
-- $72.4 million Class AX53 at AAA (sf)
-- $54.3 million Class A61 at AAA (sf)
-- $54.3 million Class AX61 at AAA (sf)
-- $54.3 million Class A62 at AAA (sf)
-- $54.3 million Class AX62 at AAA (sf)
-- $54.3 million Class A63 at AAA (sf)
-- $54.3 million Class AX63 at AAA (sf)
-- $18.1 million Class A71 at AAA (sf)
-- $18.1 million Class AX71 at AAA (sf)
-- $18.1 million Class A72 at AAA (sf)
-- $18.1 million Class AX72 at AAA (sf)
-- $18.1 million Class A73 at AAA (sf)
-- $18.1 million Class AX73 at AAA (sf)
-- $411.5 million Class AX at AA (high) (sf)
-- $7.0 million Class B1 at AA (sf)
-- $7.0 million Class BX1 at AA (sf)
-- $13.4 million Class B2 at A (low) (sf)
-- $13.4 million Class BX2 at A (low) (sf)
-- $9.1 million Class B3 at BBB (low) (sf)
-- $5.0 million Class B4 at BB (sf)
-- $3.8 million Class B5 at B (low) (sf)

Classes AX11, AX12, AX13, AX21, AX22, AX23, AX31, AX32, AX33, AX41, AX42, AX43, AX51, AX52, AX53, AX61, AX62, AX63, AX71, AX72, AX73, AX, BX1 and BX2 are interest-only (IO) certificates. The class balances represent notional amounts.

Classes A11, AX11, A12, AX12, A13, AX13, A21, AX21, A22, AX22, A23, AX23, A31, A32, A41, A42, A51, AX51, A52, AX52, A53, AX53, A61, A62, A71 and A72 are exchangeable certificates. These classes can be exchanged for combinations of exchange certificates as specified in the offering documents.

The AAA (sf) ratings on the Super Senior Certificates reflect the 20.00% of credit enhancement provided by the Senior Support Certificates and the Subordinate Certificates in the pool. The AA (high) (sf), AA (sf), A (low) (sf), BBB (low) (sf), BB (sf) and B (low) (sf) ratings reflect 9.10%, 7.55% 4.60%, 2.60%, 1.50% and 0.65% of credit enhancement, respectively.

Other than the classes specified above, DBRS does not rate any other classes in this transaction.

This transaction is a securitization of a portfolio of mostly expanded prime qualified mortgage (QM), non-QM first-lien residential mortgages and investor loans. The Certificates are backed by 583 loans with a total principal balance of $452,664,294 as of the Cut-Off Date (October 1, 2018).

The originators for the mortgage pool are JMAC Lending (25.0%); LendUS, LLC (9.9%); American Pacific Mortgage Corp. (9.5%); loanDepot.com, LLC (9.3%); and various other originators, each comprising less than 5.0% of the mortgage loans.

The loans will be serviced by New Penn Financial, LLC doing business as Shellpoint Mortgage Servicing. Nationstar Mortgage LLC will act as the Master Servicer. Galton Mortgage Loan Seller LLC (the Seller) will act as the Servicing Administrator. Wilmington Savings Fund Society, FSB, will serve as Trustee. Citibank, N.A. will act as Securities Administrator. U.S. Bank National Association will serve as the Custodian.

The mortgages were generally originated pursuant to underwriting standards that conform to Galton Funding (Galton) acquisition criteria. Galton has established product matrices for different loan programs. The majority of the loans in this securitization (98.5%) are Credit Grade A+ borrowers with unblemished credit who may not meet prime jumbo or agency/government guidelines. While certain loan attributes are comparable to those in post-crisis prime transactions, the loans in the GFMT 2018-2 portfolio may have IO features, higher debt-to-income (DTI) and loan-to-value (LTV) ratios, lower credit scores and barbelled distribution of certain characteristics as compared with recent prime securitizations.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau’s (CFPB) ability-to-repay rules, they were made to borrowers who generally do not qualify for agency, government or private-label non-agency prime jumbo products for various reasons described above. In accordance with the CFPB QM rules, 24.4% of the loans are designated as QM Safe Harbor, 7.3% as QM Rebuttable Presumption and 39.8% as non-QM. Approximately 28.5% of the loans are not subject to the QM rules.

The transaction employs a senior-subordinate shifting-interest cash flow structure that incorporates a unique feature in the calculation of interest entitlements of the Certificates. The interest entitlements, through the calculation of the net weighted-average coupon rate, are reduced by the delinquent interest that would have accrued on the stop advance loans (loans that become 120 days or more delinquent or loans where the servicer determines that the principal and interest advance would not be recoverable). In other words, investors are not entitled to any interest on such severely delinquent mortgages.

The Servicing Administrator will generally fund advances (to the extent the available aggregate servicing rights strip has first been reduced to zero to fund such amounts) of delinquent principal and interest on any mortgage until such loan becomes 120 days delinquent or until the servicer determines that an advance is not recoverable and is obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties.

The Sponsor intends to retain 5% of the fair value of all the Certificates issued by the Issuer (other than the residual certificates) to satisfy the credit risk retention requirements under Section 15G of the “Securities Exchange Act of 1934” and the regulations promulgated thereunder.

The Seller and Sponsor will have the option, but not the obligation, to repurchase any mortgage loan that becomes 90 or more days delinquent under the Mortgage Bankers Association delinquency method until the date on which the Representations and Warranties (R&W) Enforcement Party delivers the enforcement initiation report, provided that such repurchases in aggregate do not exceed 10% of the total principal balance as of the Cut-Off Date.

STRENGTHS
-- Satisfactory Underwriting Standards
-- Robust Pool Composition
-- Third-Party Due Diligence Review
-- Satisfactory Loan Performance to Date (Albeit Short)

CHALLENGES
-- Geographic Concentration
-- Non-QM, QM Rebuttable Presumption and Investor Loans
-- R&W Framework
-- Servicing Administrator’s Financial Capability

The DBRS ratings of AAA (sf), AA (high) (sf) and AA (sf) address the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Certificates. The DBRS ratings of A (low) (sf), BBB (low) (sf), BB (sf) and B (low) (sf) address the ultimate payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Certificates.

The full description of the strengths, challenges and mitigating factors are detailed in the related report.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, Interest Rate Stresses for U.S. Structured Finance Transactions, Third-Party Due Diligence Criteria for U.S. RMBS Transactions, Representations and Warranties Criteria for U.S. RMBS Transactions, Operational Risk Assessment for U.S. RMBS Originators, Operational Risk Assessment for U.S. RMBS Servicers and Legal Criteria for U.S. Structured Finance, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents or by contacting us at info@dbrs.com.