Fitch Ratings has assigned final ratings to Morgan Stanley Residential Mortgage Loan Trust 2023-1 (MSRM 2023-1).

RATING ACTIONS

Entity / Debt

Rating

Prior

MSRM 2023-1

A-1

LT

AAAsf

New Rating

AAA(EXP)sf

A-1-IO

LT

AAAsf

New Rating

AAA(EXP)sf

A-2

LT

AAAsf

New Rating

AAA(EXP)sf

A-2-IO

LT

AAAsf

New Rating

AAA(EXP)sf

A-3

LT

AAAsf

New Rating

AAA(EXP)sf

A-4

LT

AAAsf

New Rating

AAA(EXP)sf

A-4-IO

LT

AAAsf

New Rating

AAA(EXP)sf

A-5

LT

AAAsf

New Rating

AAA(EXP)sf

A-6

LT

AAAsf

New Rating

AAA(EXP)sf

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

Fitch has assigned final ratings to the residential mortgage-backed certificates issued by Morgan Stanley Residential Mortgage Loan Trust 2023-1 (MSRM 2023-1), as indicated.

This is the 11th post-crisis transaction off the Morgan Stanley Residential Mortgage Loan Trust shelf; the first transaction was issued in 2014. This is the ninth MSRM transaction that comprises loans from various sellers and is acquired by Morgan Stanley in its prime-jumbo aggregation process.

The certificates are supported by 355 prime-quality loans with a total balance of approximately $349.48 million as of the cutoff date. The pool consists of 100% fixed-rate mortgages (FRMs) from various mortgage originators. The servicers for this transaction are Specialized Loan Servicing, LLC (SLS) and First National Bank of Pennsylvania. Nationstar Mortgage LLC (Nationstar) will be the master servicer.

Of the loans, 100.0% qualify as safe-harbor qualified mortgage (SHQM) or SHQM average prime offer rate (APOR) loans. There are no high-priced QM loans or non-QM loans in the pool.

There is no exposure to LIBOR in this transaction. The collateral comprises 100% fixed-rate loans, and the certificates are fixed rate and capped at the net weighted average coupon (WAC).

Like other prime transactions, this transaction utilizes a senior-subordinate, shifting-interest structure with subordination floors to protect against tail risk.

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 6.5% above a long-term sustainable level (versus 7.8% on a national level as of March 2023, down 2.7% since last quarter). The rapid gain in home prices through the pandemic has seen signs of moderating with a decline observed in 3Q22. Driven by the strong gains seen in 1H 2022, home prices rose 5.8% yoy nationally as of December 2022.

High Quality Mortgage Pool (Positive): The collateral consists of 30-year, fixed-rate fully amortizing loans seasoned at approximately 14.9 months in aggregate as determined by Fitch. Of the loans, 62.1% were originated through the sellers' retail channels. The borrowers in this pool have strong credit profiles (a 765 FICO, as determined by Fitch) and relatively low leverage (a 73.6% sustainable loan-to-value ratio [sLTV], as determined by Fitch). A total of 136 loans are over $1.0 million, and the largest loan totals $2.5 million. Fitch considered 100% of the loans in the pool to be fully documented loans. Lastly, 11 loans in the pool comprise nonpermanent residents, and none of the loans in the pool were made to foreign nationals.

Approximately 38% of the pool is concentrated in California with moderate MSA concentration. The largest MSA concentration is in the Los Angeles MSA (13.1%), followed by the San Francisco MSA (5.5%) and the Riverside MSA (5.1%). The top three MSAs account for 24% of the pool. There was no adjustment for geographic concentration.

Shifting-Interest Structure and Full Advancing (Mixed): The mortgage cash flow and loss allocation are based on a senior-subordinate, shifting-interest structure whereby the subordinate classes receive only scheduled principal and are locked out from receiving unscheduled principal or prepayments for five years. The lockout feature helps to maintain subordination for a longer period should losses occur later in the life of the transaction. The applicable credit support percentage feature redirects subordinate principal to classes of higher seniority if specified credit enhancement (CE) levels are not maintained.

The servicers will provide full advancing for the life of the transaction (the servicers are expected to advance delinquent P&I on loans that enter a coronavirus forbearance plan). Although full P&I advancing will provide liquidity to the certificates, it will also increase the loan-level loss severity (LS) since the servicers look to recoup P&I advances from liquidation proceeds, which results in fewer recoveries.

Nationstar is the master servicer and will advance if the servicers are unable to. If the master servicer is not able to advance, then the securities administrator (Citibank, N.A.) will advance.

Credit Enhancement Floor (Positive): A CE or senior subordination floor of 1.80% has been considered to mitigate potential tail-end risk and loss exposure for senior tranches as the pool size declines and performance volatility increases due to adverse loan selection and small loan count concentration. Additionally, a junior subordination floor of 1.10% has been considered to mitigate potential tail-end risk and loss exposure for subordinate tranches as the pool size declines and performance volatility increases due to adverse loan selection and small loan count concentration.

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 MVDs than assumed at the MSA level. Sensitivity analyses were conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.

This defined stress sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10%, 20% and 30%, in addition to the model projected MVD, which is 39.2% in the 'AAAsf' stress. The analysis indicates that there is some potential rating migration with higher MVDs, 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

This 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 being assigned ratings of 'AAAsf'.

This section provides insight into the model-implied sensitivities the transaction faces when one assumption is modified, while holding others equal. The modelling process uses the modification of these variables to reflect asset performance in up- and down environments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. It should not be used as an indicator of possible future performance.

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.

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 SitusAMC, Clayton, and Covius. The third-party due diligence described in Form 15E focused on four areas: compliance review, credit review, valuation review and data integrity. Fitch considered this information in its analysis and, as a result, Fitch did not make any adjustments to its analysis based on the findings. Due to the fact that there was 100% due diligence provided and there were no material findings, Fitch reduced the 'AAAsf' expected loss by 0.24%.

DATA ADEQUACY

Fitch relied on an independent third-party due diligence review performed on 100% of the pool. The third-party due diligence was generally consistent with Fitch's 'U.S. RMBS Rating Criteria.' SitusAMC, Clayton and Covius were engaged to perform the review. Loans reviewed under this engagement were given compliance, credit and valuation grades, and assigned initial grades for each subcategory. Minimal exceptions and waivers were noted in the due diligence reports. Refer to the Third-Party Due Diligence section of the presale report for more detail.

Fitch also utilized data files that were made available by the issuer on its SEC Rule 17g-5 designated website. Fitch received loan-level information based on the American Securitization Forum's (ASF) data layout format, and the data is considered to be comprehensive. The ASF data tape layout was established with input from various industry participants, including rating agencies, issuers, originators, investors and others to produce an industry standard for the pool-level data in support of the U.S. RMBS securitization market. The data contained in the ASF layout data tape were reviewed by the due diligence companies, and no material discrepancies were noted.

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.

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 that 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 with 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

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

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