Mill City Holdings, which was recently assigned ownership interests in a pair of CarVal Investors’ re-performing mortgage securitizations from 2015, is preparing a third deal involving formerly delinquent and defaulted mortgages.

Mill City Mortgage Loan Trust 2016-1 is a transaction of a portfolio of 1,986 distressed or re-performing mortgages funded by $504.5 million in asset-backed notes backed by an original pool of $565.4 million in outstanding loans.

The transaction features eight tranches of notes, with the final two tranches currently unrated. Bond rating agency DBRS gives the class A1 notes an ‘AAA’ rating with a credit enhancement of 36.15%. The class M1, M2, and M3 notes are rated ‘AA’, ‘A’, and ‘BBB’ respectively, with credit enhancements ranging between 19% and 30%.

The Class B notes feature four tranches. DBRS rated the class B1 notes ‘BB’ with 14.9% credit enhancement and class B2 rated ‘B’ with an 11% credit enhancement. Only 6.2% of the loans aged under sixty months.

The collateral pool is made up of about 45% fixed-rate mortgages and 25% hybrid adjustable rate mortgages. According to DBRS, approximately 494 loans are fixed step-rate loans. Approximately 39.3% of the pool has interest-only features upon origination. 10.7% of the loans are still in their interest-only period.

MCMLT 2016-1 is the largest of the three transactions conducted through the Mill City trust since the debut 2015-1 transaction last November. The new transaction features a lower average loan balance ($254,051), a higher weighted-average coupon (3.954%) and a lower average FICO score of the borrowers in the pool.

All of the loans are re-performing, with most (70.1%) having undergone a loan medication. Nearly 2% of the loans are post-bankruptcy loans, a category that was a very miniscule part of both MCMLT 2015-2 (under 0.1%) and MCMLT 2015-1 (0.3%).

Mill City has included more loans with a history of longer-duration delinquencies. For example, 7.3% of the loans in the latest transaction were delinquent thirty days at least three times in the past three years; whereas fewer than 3% in 2015-2 and 1.8% in 2015-1 had that frequency. Mill City’s new transaction, which closes Aug. 19, also had a higher number of loans with multiple 60- and 90-day delinquencies than prior pools.

The loans are being sold into the trust from four transferring trusts that acquired the loans between 2013 and 2016, as entities of Luxembourg-based representation provider CVI CVF III Lux Master S.a.r.l.

Mill City’s two prior deals were securitizations organized by Minneapolis-based CarVal, an alternative asset management firm and independent Cargill affiliate that jumped into re-performing securitizations earlier in 2015. MCMLT 2015-1 was a $474.1 million offering of securities, and 2015-2 was a smaller $252.04 million asset-backed deal.

On Monday, Moody’s Investors Service reported that it would not change the prior ratings of 2015-1 and 2015-2 following the ownership structure change of the depositor to Mill City Holdings LLC.

Shellpoint Mortgage Servicing and Fay Servicing LLC are the servicers for the transaction, with U.S. Bank National Association acting as the indenture trustee and administrator and Deutsche Bank National Trust as the custodian.

Mill City Mortgage Loan Trust 2016-1’s pool is geographically concentrated with California, accounting for 35.3% of the pool. The top three states represent over half of the collateral pool.

DBRS finds that employees weak representations and warranties framework. The loans are, however, of a better credit quality than other distressed or re-performing pools in DBRS’s experience.

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