Revenue from a stream of 432 residential transition loans will secure $477.2 million in mortgage-backed securities (MBS) from the Homeward Opportunities Fund Trust, 2025-RRTL1.
The deal will issue the notes through about seven tranches of notes, with classes A and M, according to Morningstar | DBRS. Homeward Opportunities is structured around an 18-month revolving portfolio of RTLs, DBRS said.
The rating agency assigned an A rating to classes A1, A1A and 1B; BBB to the A2 class; BB to the M1 class; and B to the M2 tranche. Homeward Opportunities Fund is sponsoring the deal and is the servicing administrator, DBRS said.
Homeward Opportunities will repay investors through a sequential-pay structure. Credit enhancements include subordination, overcollateralization, and excess spread, DBRS said.
The deal also gets credit enhancement from three reserve accounts. An interest reserve account exists to help cover the first three months of interest to the notes, an expense reserve account covers transaction fees, and an accumulation account (and the expense reserve account) is funded upfront and replenished from the cash flows of the transaction, DBRS said.
Wells Fargo and Morgan Stanley lead a group of initial note purchasers that includes Barclays Capital and Goldman Sachs.
Aside from that, three collateral performance trigger events that can force an early amortization are structured into the deal. One trigger will happen if more than 10% of pool experiences a delinquency rate of 60 days or more; a default rate of more than 5.0% for each of the last three months—and they can include certain loss mitigation and modifications—and a 12-month extension rate is greater than 5.0% for each of the last three months, the rating agency said.
The deal is subject to several challenges, however, which go to the nature of residential transition loans (RTL). RTLs, which are mortgages that investors take out to purchase, repair and rehabilitate properties. One key characteristic is that a portion of the maximum principal amount is sometimes unfunded some RTLs are unfunded. They can get that remaining funding through construction draw requests, and that falls on the servicers, which DBRS has deemed as unrated entities, the agency said.
Also, by the nature of RTL loans, the properties are often unoccupied during the life of the collateralizing asset—not generating income—traditional income and employment documentation are not normally required during the underwriting process, and they are typically interest-only balloon loans, with full repayment due at maturity. While the repayment structure is a familiar characteristic from the commercial construction loan space, I/O balloon loans in a crisis era has resulted in truly adverse performance of such loans, the rating agency said.
