Rating Action: Moody's assigns definitive ratings to New ResidentialMortgage Loan Trust 2022-SFR1Global Credit Research - 28 Jan 2022New York, January 28, 2022 -- Moody's Investors Service ("Moody's") hasassigned definitive ratings to four classes of certificates backed by onefixed-rate loan secured by mortgages on 1,200 single-family rentalproperties owned by New Residential Mortgage Loan Trust 2022-SFR1 (NRMLT2022-SFR1) securitization. The properties were acquired by affiliates ofNew Residential Investment Corp. (NRZ), the loan sponsor, between August2019 and September 2021.The complete rating action is as follows:Issuer: New Residential Mortgage Loan Trust 2022-SFR1Cl. A, Definitive Rating Assigned Aaa (sf)Cl. B, Definitive Rating Assigned Aa3 (sf)Cl. C, Definitive Rating Assigned A3 (sf)Cl. D, Definitive Rating Assigned Baa3 (sf)RATINGS RATIONALEOverviewThe advance rate for this transaction at stresses consistent with a Aaarating level is 26.75%. Moody's uses the advance rate to determine whetherthe asset value is sufficient to support a targeted rating level given thesize of the transaction's liabilities.Key Transaction FeaturesLeverage: The loan's leverage is high, which could reduce the sponsor'sincentives to maintain the properties in good condition in a stressedeconomic environment. The total leverage of 95.00% in NRMLT 2022-SFR1 isin line with FRTKL 2021-SFR1 at 95.0% and lower than Progress 2021-SFR11at 99.5%. The corresponding Moody's LTV is 115.5%, compared to FRTKL2021-SFR1 at 118.5% and Progress 2021-SFR11 at 124.4%. We reduced ourstressed recoveries to account for Moody's LTV exceeding 100%. The loansponsor, NRZ, will retain 5% of the initial certificate balance of eachclass of the certificates to satisfy risk retention obligations.Excess Collateral Release: Similar to recent SFR transactions, this dealwill include an Excess Collateral Release (ECR) feature whereby thesponsor can remove properties without prepaying the loan balance, orpaying yield maintenance or a release premium to the trust. The ECR willbe subject to rating agency confirmation, or RAC, that the ratings willnot be withdrawn or downgraded as a result of the exercise of suchfeature. The ECR will also have to satisfy certain LTV ratio requirementas well as geographic diversity and rents and cash flow tests.Voluntary Substitution: The securitization allows for up to 5% voluntarysubstitution (by property count) over the life of the transaction. Thetotal property substitution can be increased up to a maximum of 35.0%subject to certain conditions. Any substitution over 5% is subject toreceipt of a no downgrade confirmation (a rating agency condition, orRAC). At the time of a RAC request, we would likely consider, among otherthings, the credit profile of the updated pool, including geographicconcentrations, and third party reviews of the substitute properties. Ourrecovery analysis takes into account the risk of increased geographicconcentration because of voluntary substitution and limited third-partyreview scope on substituted properties.Alignment of Interest: In typical SFR transactions, the property manageris usually an affiliate of the sponsor. In contrast, in this transaction,the sponsor delegates the day-to-day management of the properties in thepool to an external third-party property manager, RENU Property Mgt LLC(RENU), who is also providing property management services for other SFRproperty owners. The alignment of interest risk is partially mitigatedbecause of the arrangement between RENU and NRZ. RENU and NRZ are alignedthrough a Make Whole Agreement (MWA). The MWA compares the portfolioactual performance versus the underwriting assumptions from RENU. In casethe portfolio actual yield exceeds the targeted yield, RENU will earn anadditional fee. On the other hand, if the portfolio actual yield is belowthe targeted yield, RENU will make NRZ whole so that NRZ will achieve itsunderwritten cap rate. This arrangement strengthens the sponsor/managementarrangement in this transaction because it incentivizes the propertymanager to effectively manage the portfolio.Enhanced structural features: The transaction structure has a multi-tierDSCR test and a payment-in-kind (PIK) feature for classes F, G, H, and I.Similar to Progress 2021-SFR11, the PIKable certificates can receivepartial interest payment even before the multi-tier DSCR test kicks in. Inour opinion, this structure is slightly credit negative because in severalscenarios, available funds in the cash collateral can be lower than priortransactions. In an event of default, funds in this account can act asadditional credit enhancement to the certificates. Our advance ratesreflect a small adjustment for this feature.Payment Priority: On each monthly payment date, except during a loan eventof default, funds in the cash management account will be appliedsequentially to the security deposit account, tax account, and insuranceaccount as necessary in order to make required payments, then to thelender, funds sufficient to pay the monthly debt service coverage whichwill be used to pay interest due on class A through class E-2sequentially, and, if funds are available, to pay the class F up to thelesser of its coupon and 4.5%, to pay the class G up to the lesser of itscoupon and 4.5%, to pay the class H up to the lesser of its coupon and4.5%, to pay interest due on class H up to the lesser of its coupon and4.5%, to pay interest due on class I and then if the DSCR (calculated asof the last day of each calendar quarter) for the non-PIK bonds is atleast 1.20x, to pay remaining interest due on class F (if any), and if theDSCR for classes A through F is at least 1.20x, to pay remaining interestdue on class G, if the DSCR for class A through G is at least 1.20x, topay remaining interest due on class H and if the DSCR for class A throughH is at least 1.20x, to pay remaining interest due on class I.The interest otherwise due on the PIK bonds will be subordinated tomandatory principal repayment of the loan, property management fees, andthe capital expenditure reserve account. Any remaining cash will betrapped in the cash collateral account. Failure to pay current interest tothe class F, class G, class H and class I will not result in an event ofdefault, but the interest due will accrue to the balance of these bonds.Once the DSCR ratio for class A through class E-2 is above 1.20x for twoconsecutive quarters, the funds in the cash collateral account will firstbe used to reduce the balance of the PIK bonds by the amount of theirrespective deferred interest amounts in sequential order.Voluntary prepayments from unrestricted cash not associated with a releaseof collateral would be distributed in reverse sequential order. Thisbenefits the trust not only because the securitized loan balance woulddecrease while the collateral balance would remain unchanged, but thereverse sequential payment would also improve the transaction debt servicecoverage ratio as weighted average spread on the loan decreases. Overall,we are credit neutral on this particular feature as the cash flow is fromthe sponsor and not from the trust, and is an option that the sponsor canexercise. Of note, voluntary prepayments to cure low DSCR trigger stillremain sequential.This deal has a three-year yield maintenance premium that requires theborrowers to pay a yield maintenance amount following the voluntaryrelease of the property. With respect to 7.5% of optional releaseproperties, the sponsor may release these properties at any time and willnot be subjected to the payment of yield maintenance premium. We arecredit neutral on this feature since the yield maintenance premium amountis not used to pay down the notes and we do not rate to this amount. Inaddition, this deal is a non-amortizing deal. The cash from the propertyrelease payments will benefit the trust since proceeds from the sale up tothe allocated loan amount plus the premium release amount would beavailable to repay the notes. Since the optional release properties arenot subject to yield maintenance premium, the borrowers may be moreinclined to release the property since it is cost effective for theborrowers.Recovery analysisThe Final Recovery Value, which varies by rating levels, is calculatedthrough the following steps.1. For all the 1,200 newly acquired properties, we determined Moody'sValue by considering both (a) the sponsor's acquisition cost (the price itpaid to acquire the properties) adjusted for improvements that the sponsorhas made and any home price appreciation since acquisition and (b) themost recent BPO, to which we applied a 15% haircut because the value wasnot based on full appraisal by a licensed appraiser, a process we considerto be most reliable. To adjust the acquisition cost for improvements andhome price appreciation for the properties, we added 50% of the cost ofany renovations that the sponsor completed, plus 50% of our estimate ofthe increase in the property's value from home price appreciation, basedon the change in the MSA-specific National Association of Realtors' medianhome value since acquisition. We did not give a home price appreciationbenefit to lower-value properties because they tend not to appreciate asmuch as higher value ones and are less liquid. We estimate the Moody'svalue to be $231,796,121.2. We assumed that a limited percentage of the properties would be soldout of the transaction at full market value prior to a borrower default,netting proceeds equal to the allocated loan amounts plus a pre-determinedpremium on those properties.3. To account for potential adverse selection and increased geographicconcentration in certain markets, in the disposition of the propertiesremaining in the pool after a default, Moody's applied a home pricedepreciation factor to the properties' values ranging from 30% to 50% ofthe Moody's Values at a Aaa level, depending on the MSA. Our home pricedepreciation assumptions are informed by, among other things, a review ofthe housing markets in the key MSAs and geographic concentration asmeasured by the effective number of MSAs.4. We then calculated the revenue and expense adjustments for thedistressed properties that were sold. The revenue would come from thein-place rental income on the portion of properties that were still rentedwhile awaiting liquidation, and the expenses, from in-place expenses,including maintenance, taxes, servicing, and other fees and costs on theproperties.Both the revenues and costs depend heavily on the assumed timelinesnecessary for foreclosure and liquidation. The foreclosure timeline willdepend on whether the trust forecloses on the equity pledge from theborrower, which is faster, or on the liens from the mortgages. The lengthof a property foreclosure itself depends in part on whether the propertyis in a judicial or non-judicial foreclosure state. In our Aaa stressscenario, we assume that the trust pursues the longer and costliermortgage foreclosure route; in our Baa2 stress scenario, we assume that itpursues the quicker equity foreclosure route. We calculated revenues andexpenses in three additional steps:5. In our Aaa stress scenario, we assume that the total cost required tomaintain all the properties remaining in the pool after default, includingour estimates for real estate taxes, property management fees, vacancy,homeowners' association fees, insurance, repairs, and sales and marketing,would stretch for 37 months, while a portion of the properties wouldgenerate rental income for 27 months. We placed a lighter stress onforeclosure timelines for this transaction than in a typical RMBStransaction because we expect the foreclosure process to be quicker giventhat the trust does not have to foreclose on individual borrower; instead,it will foreclose either on the lien of the mortgage or the equity in theSPE borrower. 6. Finally, Moody's assumed that the servicer will continueto advance the interest (to the extent deemed recoverable) on thecertificates until the properties are liquidated, and estimated theinterest accrued on the servicer advances.6. We also estimated foreclosure costs that included fixed legal costs,special servicing fees of 0.25% of the loan amount; special servicingliquidation fees of 0.75% of the property value; and property transfertaxes.7. Last, we assume that the master servicer will continue to advanceinterest on the certificates until the properties are liquidated, andestimated the necessary interest accrued on the amount of serviceradvances. The final recovery value is the sum of the recovery values ofthe premium released properties (Step 3), the recovery values of thedistressed-sold properties (Step 4), and the rental income followingdefault (Step 5), minus the maintenance costs (Step 6), foreclosureexpenses (Step 7), and advance reimbursements. The transaction's advancerate is the ratio of the liabilities to the final recovery value. We usethe advance rate to determine whether the asset value is sufficient tosupport a targeted rating level, given the amount of the transaction'sliabilities. To gauge the sensitivity of the transaction's advance rate todifferent underlying assumptions, we ran scenario analyses varying thehome price depreciation rate, vacancy rate, and premium releasepercentage.The Servicer and Special ServicerA highly rated servicer, Midland Loan Services, a Division of PNC Bank,National Association (long-term senior unsecured A2 stable, long-term bankdeposits Aa3 stable) is responsible for advancing timely payments ofinterest on the loan to the extent deemed recoverable. The servicer willalso receive monthly updates on the status of every property backing thetransaction. Having a special servicer that can step in to manage theportfolio to maximize recoveries for the certificate holders in the eventof a borrower default is credit positive.Of note, the master servicer will only be advancing interest payments toclass A through class E-2 and not class F, G, H and I. In addition,servicing fees will be calculated based on outstanding principal balanceminus any deferred interest.Midland Loan Services will also be the special servicer for thistransaction and will be responsible for servicing and administering theloan in the event of default or in the case of a reasonably foreseeabledefault that could give rise to the transfer of servicing to the specialservicer and of any foreclosed collateral. Midland is an integral part ofPNC's real estate finance business, and has more than 20 years ofexperience as a commercial mortgage master, and primary and specialservicer for CMBS securitizations, government sponsored enterprises andinstitutional investors.Although we deem the servicing arrangement to be adequate, we applied anegative adjustment to our recoveries to account for the concentrationrisk of having a limited number of available servicers in SFRsecuritizations.Cash flow analysisMoody's weighted average adjustment to the pool's underwritten net cashflow was -25.3%. Based on Moody's assumed starting interest rate, theMoody's debt service coverage ratio is 1.08x for class A through class I.For more details on Moody's CMBS approach to analyzing rental cash flows,refer to "Large Loan and Single Asset/Single Borrower CommercialMortgage-Backed Securitizations Methodology".Factors that would lead to an upgrade or downgrade of the ratings:UPMoody's would consider upgrading the transaction or some of its tranchesif, for example, properties underlying the portfolio were to appreciatesubstantially and the property conditions were to remain well maintained.DOWNMoody's would consider downgrading the transaction if the transaction wereto breach its DSCR trigger. Additionally, breaches of certain loancovenants could lead to an event of default in the transaction and, ifunremedied, a downgrade.Moody's will also monitor the transaction's portfolio mix for anyunexpected changes. Unexpected negative changes could result from unusualpatterns in the properties that are released by a sponsor as contemplatedby the transaction documents. Also, where available, changes in rentrenewal and lease turnover rates and time to re-rent could indicateperformance issues.The principal methodology used in these ratings was "Single-Family RentalSecuritizations Methodology" published in July 2020 and available athttps://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1214103.Alternatively, please see the Rating Methodologies page on www.moodys.comfor a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions andsensitivity analysis, see the sections Methodology Assumptions andSensitivity to Assumptions in the disclosure form. Moody's Rating Symbolsand Definitions can be found at:https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.Further information on the representations and warranties and enforcementmechanisms available to investors are available onhttp://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1316219.The analysis includes an assessment of collateral characteristics andperformance to determine the expected collateral loss or a range ofexpected collateral losses or cash flows to the rated instruments. As asecond step, Moody's estimates expected collateral losses or cash flowsusing a quantitative tool that takes into account credit enhancement, lossallocation and other structural features, to derive the expected loss foreach rated instrument.Moody's quantitative analysis entails an evaluation of scenarios thatstress factors contributing to sensitivity of ratings and take intoaccount the likelihood of severe collateral losses or impaired cash flows.For ratings issued on a program, series, category/class of debt orsecurity this announcement provides certain regulatory disclosures inrelation to each rating of a subsequently issued bond or note of the sameseries, category/class of debt, security or pursuant to a program forwhich the ratings are derived exclusively from existing ratings inaccordance with Moody's rating practices. For ratings issued on a supportprovider, this announcement provides certain regulatory disclosures inrelation to the credit rating action on the support provider and inrelation to each particular credit rating action for securities thatderive their credit ratings from the support provider's credit rating. Forprovisional ratings, this announcement provides certain regulatorydisclosures in relation to the provisional rating assigned, and inrelation to a definitive rating that may be assigned subsequent to thefinal issuance of the debt, in each case where the transaction structureand terms have not changed prior to the assignment of the definitiverating in a manner that would have affected the rating. For furtherinformation please see the ratings tab on the issuer/entity page for therespective issuer on www.moodys.com.For any affected securities or rated entities receiving direct creditsupport from the primary entity(ies) of this credit rating action, andwhose ratings may change as a result of this credit rating action, theassociated regulatory disclosures will be those of the guarantor entity.Exceptions to this approach exist for the following disclosures, ifapplicable to jurisdiction: Ancillary Services, Disclosure to ratedentity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designatedagent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy forDesignating and Assigning Unsolicited Credit Ratings available on itswebsite www.moodys.com.Regulatory disclosures contained in this press release apply to the creditrating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social andgovernance (ESG) risks in our credit analysis can be found athttp://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement wasissued by one of Moody's affiliates outside the EU and is endorsed byMoody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322,Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No1060/2009 on Credit Rating Agencies. Further information on the EUendorsement status and on the Moody's office that issued the credit ratingis available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement wasissued by one of Moody's affiliates outside the UK and is endorsed byMoody's Investors Service Limited, One Canada Square, Canary Wharf, LondonE14 5FA under the law applicable to credit rating agencies in the UK.Further information on the UK endorsement status and on the Moody's officethat issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead ratinganalyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com foradditional regulatory disclosures for each credit rating.Max SaurayVice President - Senior AnalystStructured Finance GroupMoody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007U.S.A.JOURNALISTS: 1 212 553 0376Client Service: 1 212 553 1653Sonny WengVP - Sr Credit Officer/ManagerStructured Finance GroupJOURNALISTS: 1 212 553 0376Client Service: 1 212 553 1653Releasing Office:Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007U.S.A.JOURNALISTS: 1 212 553 0376Client Service: 1 212 553 1653© 2022 Moody's Corporation, Moody's Investors Service, Inc.,Moody's Analytics, Inc. and/or their licensors and affiliates(collectively, "MOODY'S"). 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