Fitch Ratings has assigned final ratings to the residential mortgage-backed certificates to be issued by Spruce Hill 2022-SH1 Mortgage Loan Trust (Spruce Hill 2022-SH1).

RATING ACTIONS

Entity / Debt

Rating

Prior

Spruce Hill 2022-SH1

A1A

LT

AAAsf

New Rating

AAA(EXP)sf

A1B

LT

AAAsf

New Rating

AAA(EXP)sf

A2

LT

AAsf

New Rating

AA(EXP)sf

A3

LT

Asf

New Rating

A(EXP)sf

M1

LT

BBBsf

New Rating

BBB(EXP)sf

B1

LT

BBsf

New Rating

BB(EXP)sf

B2

LT

Bsf

New Rating

B(EXP)sf

B3

LT

NRsf

New Rating

NR(EXP)sf

XS

LT

NRsf

New Rating

NR(EXP)sf

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The certificates are supported by 622 nonprime loans with a total balance of approximately $234 million as of the cutoff date. Loans in the pool were originated and are currently serviced by Carrington Mortgage Services, LLC.

KEY RATING DRIVERS

Updated Sustainable Home Prices (Negative): Due to Fitch's updated view on sustainable home prices, Fitch views the home price values of this pool as 12.6% above a long-term sustainable level (versus 12.2% on a national level as of October 2022, up 1.2% since last quarter). Underlying fundamentals are not keeping pace with the growth in prices, resulting from a supply/demand imbalance driven by low inventory, favorable mortgage rates and new buyers entering the market. These trends have led to significant home price increases over the past year, with home prices rising 13.1% yoy nationally as of August 2022.

Non-QM Credit Quality (Negative): The collateral consists of 622 loans, totaling $234 million and seasoned approximately nine months in aggregate. The borrowers have a moderate credit profile - 725.4 model FICO and 44.4% model debt-to-income ratio (DTI) - and leverage - 70.2% sustainable loan-to-value ratio (sLTV) and 68% combined LTV (cLTV). The pool consists of 54.2% of loans where the borrower maintains a primary residence, while 43.8% comprise an investor property. Additionally, 55.8% are nonqualified mortgage (non-QM) and 0.35% are Safe Harbor (QM-QH); the QM rule does not apply to the remainder.

Fitch's expected loss in the 'AAAsf' stress is 20.75%. This is mostly driven by the non-QM collateral and the significant investor cash flow product concentration.

Loan Documentation (Negative): Approximately 88% of the loans in the pool were underwritten to less than full documentation and 45% were underwritten to a bank statement program for verifying income, which is not consistent with Appendix Q standards and Fitch's view of a full documentation program. A key distinction between this pool and legacy Alt-A loans is that these loans adhere to underwriting and documentation standards required under the Consumer Financial Protections Bureau's Ability to Repay (ATR) Rule (ATR Rule), which reduces the risk of borrower default arising from lack of affordability, misrepresentation or other operational quality risks due to rigor of the rule's mandates with respect to the underwriting and documentation of the borrower's ATR.

Fitch's treatment of alternative loan documentation increased the 'AAAsf' expected loss by 650 bps relative to a fully documented loan.

High Percentage of DSCR Loans (Negative): There are 331 debt service coverage ratio (DSCR) products in the pool (53% by loan count). These business purpose loans are available to real estate investors that are qualified on a cash flow basis, rather than DTI, and borrower income and employment are not verified. Compared to standard investment properties, for DSCR loans, Fitch converts the DSCR values to a DTI and treats as low documentation.

Fitch's expected loss for these loans is 27.0% in the 'AAAsf' stress, which is driving the higher pool expected losses due to the 42% weighted average (WA) concentration.

Modified Sequential-Payment Structure with Limited Advancing (Mixed):

The structure distributes principal pro rata among the senior certificates while shutting out the subordinate bonds from principal until all senior classes are reduced to zero. If a cumulative loss trigger event or delinquency trigger event occurs in a given period, principal will be distributed sequentially to class A-1A, A-1B, A-2 and A-3 certificates until they are reduced to zero. Advances of delinquent P&I will be made on the mortgage loans for the first 90 days of delinquency, to the extent such advances are deemed recoverable. If the P&I advancing party fails to make a required advance, the master servicer and then securities administrator will be obligated to make such advance.

The limited advancing reduces loss severities, as a lower amount is repaid to the servicer when a loan liquidates and liquidation proceeds are prioritized to cover principal repayment over accrued but unpaid interest. The downside to this is the additional stress on the structure, as there is limited liquidity in the event of large and extended delinquencies.

Spruce Hill 2022-SH1 has a step-up coupon for the senior classes (A-1A, A-1B, A-2 and A-3). After four years, the senior classes pay the lesser of a 100-bp increase to the fixed coupon or the net WA coupon (WAC) rate. Fitch expects the senior classes to be capped by the net WAC. Additionally, after the step-up date, the B-1 and B-2 classes will become PO classes. The unrated class B-3 interest allocation goes toward the senior cap carryover amount for as long as the senior classes are outstanding. The cashflow impact to the subordinate classes increases the P&I allocation for the senior classes after the step-up date as long as the subordinate classes are not written down.

Ultimate Advancing Party Fails to Meet Counterparty Criteria (Negative): The ultimate advancing party in the transaction is the master servicer, Computershare (BBB/F3/Stable). Computershare does not hold a rating from Fitch of at least 'A' or 'F1' and, as a result, does not meet Fitch's counterparty criteria for advancing delinquent P&I payments and servicing as a liquidity provider.

Fitch believes that as a liquidity provider, Computershare plays a vital role to the transaction, and given their low rating, Fitch feels there is increased risk that the counterparty will not provide liquidity support during the life of the transaction. To account for this risk, Fitch ran additional analysis to the structure if it assumed no advancing of delinquent P&I.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at the MSA level. Sensitivity analysis was conducted at the state and national level to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.

The defined negative rating sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10.0%, 20.0% and 30.0% in addition to the model projected 43.2% at 'AAA'. The analysis indicates that there is some potential rating migration with higher MVDs for all rated classes, compared with the model projection. Specifically, a 10% additional decline in home prices would lower all rated classes by one full category.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper MVDs than assumed at the MSA level. Sensitivity analysis was conducted at the state and national level to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.

The defined positive rating sensitivity analysis demonstrates how the ratings would react to positive home price growth of 10% with no assumed overvaluation. Excluding the senior class, which is already rated 'AAAsf', the analysis indicates there is potential positive rating migration for all of the rated classes. Specifically, a 10% gain in home prices would result in a full category upgrade for the rated class excluding those assigned 'AAAsf' ratings.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

SUMMARY OF FINANCIAL ADJUSTMENTS

International scale credit ratings for Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years.

The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by AMC and Consolidated Analytics. The third-party due diligence described in Form 15E focused on credit, compliance and property valuation review. Fitch considered this information in its analysis and, as a result, Fitch made the following adjustment to its analysis: a 5% credit at the loan level for each loan where satisfactory due diligence was completed. This adjustment resulted in a 45bps reduction to the 'AAAsf' expected loss.

DATA ADEQUACY

Fitch also utilized data files that were made available by the issuer on its SEC Rule 17g-5 designated website. The loan-level information Fitch received was provided in the American Securitization Forum's data layout format.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The principal sources of information used in the analysis are described in the 'Applicable Criteria'.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

ESG Considerations

Spruce Hill 2022-SH1 has an ESG Relevance Score of '4' for Governance due to transaction parties and operational risk, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

(C) 2022 Electronic News Publishing, source ENP Newswire