OREANDA-NEWS. Fitch rates Mill City Mortgage Loan Trust 2016-1 as follows:

--$322,152,000 class A1 notes 'AAAsf'; Outlook Stable;

--$32,543,000 class M1 notes 'AAsf'; Outlook Stable;

--$27,750,000 class M2 notes 'Asf'; Outlook Stable;

--$21,948,000 class M3 notes 'BBBsf'; Outlook Stable;

--$24,975,000 class B1 notes 'BBsf'; Outlook Stable;

--$19,677,000 class B2 notes 'Bsf'; Outlook Stable.

The following classes will not be rated by Fitch:

--$34,057,000 class B3 notes;

--$21,443,264.44 class B4 notes.

The notes are supported by one collateral group that consists of 1,986 re-performing mortgages with a total balance of approximately $504.55 million (which includes $19.5 million, or 3.87%, of the aggregate pool balance in non-interest-bearing deferred principal amounts) as of the cutoff date.

Distributions of principal and interest and loss allocations are based on a traditional senior subordinate, sequential structure. The sequential-pay structure locks out principal to the subordinated notes until the most senior notes outstanding are paid in full. The servicers will not be advancing delinquent monthly payments of principal and interest (P&I).

The 'AAAsf' rating on the class A1 notes reflects the 36.15% subordination provided by the 6.45% class M1, 5.50% class M2, 4.35% class M3, 4.95% class B1, 3.90% class B2, 6.75% class B3 and 4.25% class B4 notes.

Fitch's ratings on the class notes reflect the credit attributes of the underlying collateral, the quality of the servicers, Shellpoint Mortgage Servicing (Shellpoint), rated 'RSS3+' and Fay Servicing, LLC (Fay), rated 'RSS3+', and the representation (rep) and warranty framework, minimal due diligence findings and the sequential pay structure.

KEY RATING DRIVERS

Distressed Performance History (Concern): The collateral pool consists primarily of peak-vintage seasoned re-performing loans (RPLs), including loans that have been paying for the past 24 months, which Fitch identifies as 'clean current' (79.2%), and loans that are current but have recent delinquencies or incomplete paystrings, identified as 'dirty current' (20.8%). All loans were current as of the cutoff date. 70.1% of the loans have received modifications.

Due Diligence Findings (Concern): The third-party review (TPR) firm's due diligence review resulted in approximately 282 loans (14%) graded 'C' and 'D', of which 122 were subject to a loss severity adjustment for issues regarding high cost testing. In addition, timelines were extended on 71 loans that were missing final modification documents. Fitch also assumed a 100% loss on 12 loans that did not receive a compliance review to account for the potential risk for high cost issues. The TPR firm did not review the servicing comments for the 62 loans that experienced a delinquency in the past 12 months. However, Fitch received and reviewed the servicing comments for these loans and the comments did not indicate any impending foreclosure.

No Servicer P&I Advances (Mixed): The servicers will not be advancing delinquent monthly payments of P&I, which reduces liquidity to the trust. However, as P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust, the loan-level loss severity (LS) are less for this transaction than for those where the servicer is obligated to advance P&I. Structural provisions and cash flow priorities, together with increased subordination, provide for timely payments of interest to the 'AAAsf' and 'AAsf' rated classes. Although the lower rated bonds may experience long periods of interest deferral in a stress scenario, all classes are expected to ultimately recover all interest due in their respective rating stress scenarios.

Sequential-Pay Structure (Mixed): The transaction's cash flow is based on a sequential-pay structure whereby the subordinate classes do not receive principal until the senior classes are repaid in full. Losses are allocated in reverse-sequential order. Furthermore, the provision to re-allocate principal to pay interest on the 'AAAsf' and 'AAsf' rated notes prior to other principal distributions is highly supportive of timely interest payments to those classes, in the absence of servicer advancing.

Limited Life of Rep Provider (Concern): CVI CVF III Lux Master S. a.r. l., as rep provider, will only be obligated to repurchase a loan due to breaches prior to the payment date in September 2017. Thereafter, a reserve fund will be available to cover amounts due to noteholders for loans identified as having rep breaches. Amounts on deposit in the reserve fund, as well as the increased level of subordination, will be available to cover additional defaults and losses resulting from rep weaknesses or breaches occurring on or after the payment date in September 2017. The rep provider for this transaction is different from the prior two MCMLT transactions and is an indirect owner of the sponsor, Mill City Holdings, LLC.

Tier 2 Representation Framework (Concern): Fitch generally considers the representation, warranty, and enforcement (RW&E) mechanism construct for this transaction to be generally consistent with a Tier 2 framework due to the inclusion of knowledge qualifiers and the exclusion of loans from certain reps as a result of third-party due diligence findings. Thus, Fitch increased its 'AAAsf' loss expectations by approximately 235 basis points (bps) to account for increased credit risk arising from weaknesses in the reps.

Timing of Recordation and Document Remediation (Neutral): An updated title and tax search, as well as a review to confirm that the mortgage and subsequent assignments were recorded in the relevant local jurisdiction, was also performed. The review confirmed that all mortgages and subsequent assignments were recorded in the relevant local jurisdiction or were in the process of being recorded.

While the expected timelines for recordation and remediation are viewed by Fitch as reasonable, the obligation of CVI CVF III Lux Master S. a.r. l. to repurchase loans, for which assignments are not recorded and endorsements are not completed by the payment date in September 2017, aligns the issuer's interests regarding completing the recordation process with those of noteholders. While there will not be an asset manager in this transaction, the indenture trustee will be reviewing the custodian reports. The indenture trustee will request CVI CVF III Lux Master S. a.r. l. to purchase any loans with outstanding assignment and endorsement issues two days prior to the September 2017 payment date.

Clean Current Loans (Positive): Fitch's analysis of loans that have had clean pay histories for 24 months or more found a reduced probability of default relative to unseasoned loans with similar attributes. To account for this difference, Fitch reduced the pool's lifetime default expectations by approximately 20%.

Deferred Amounts (Negative): Non-interest-bearing principal forbearance amounts totaling $19.5 million (3.87% of the unpaid principal balance) are outstanding on 520 loans. Fitch included the deferred amounts when calculating the borrower's LTV and sLTV, despite the lower payment and amounts not being owed during the term of the loan. The inclusion resulted in higher PDs and LS than if there were no deferrals. Fitch believes that borrower default behavior for these loans will resemble that of borrowers with higher LTVs, as exit strategies (that is, sale or refinancing) will be limited relative to those borrowers with more equity in the property.

Bulk Sale Rights: On the first payment date in which the aggregate pool balance is less than 20% of the initial balance, the controlling holder will have the option to have the issuer sell the remaining loans in total as long as the proceeds are not less than the minimum price. The minimum price is set as the greater of the fair value price of all remaining loans (including any fees) and the sum of the outstanding class principal balance, unpaid interest and any fees, expenses and indemnification amounts.

Solid Alignment of Interest (Positive): The sponsor, Mill City Holdings, LLC, will acquire and retain a 5% interest in each class of the securities to be issued. In addition, the rep provider is an indirect owner of the sponsor.

CRITERIA APPLICATION

Fitch's analysis incorporated one criteria variation. The TPR firm did not conduct a BPO reconciliation on a sample of the loans as described in the 'U. S. RMBS Seasoned and Re-performing Loan criteria'. There is no rating impact as the review is a cursory check to determine if the BPOs were conducted on the correct property. This review is conducted by an appraisal company, which Fitch reviewed, providing the BPOS as part of their quality control process.

RATING SENSITIVITIES

Fitch's analysis incorporates sensitivity analyses to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at both the metropolitan statistical area (MSA) and national levels. The implied rating sensitivities are only an indication of some of the potential outcomes and do not consider other risk factors that the transaction may become exposed to or be considered in the surveillance of the transaction.

Fitch conducted sensitivity analysis determining 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 38.6% at 'AAAsf'. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.

Fitch also conducted sensitivities to determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'.

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 JCIII & Associates (JCIII), AMC Diligence LLC (AMC) and Meridian Asset Services (Meridian). The third-party due diligence described in Form 15E focused on regulatory compliance, pay history, the presence of key documents in the loan file and data integrity. In addition, Meridian was retained to perform an updated title and tax search, as well as a review to confirm that the mortgage and subsequent assignments were recorded in the relevant local jurisdictions.

A pay history and data integrity review was competed on 100% of the pool. A regulatory compliance review was conducted on 99% of the pool. A servicing comment review was not performed.

Fitch considered this information in its analysis and as a result, Fitch made the following adjustment(s) to its analysis:

Fitch made an adjustment on 122 loans that were subject to federal, state and/or local predatory testing. These loans contained material violations including an inability to test for high cost violations or confirm compliance, which could expose the trust to potential assignee liability. These loans were marked as 'indeterminate.' Typically, the HUD issues are related to missing the Final HUD, illegible HUDs, incomplete HUDs due to missing pages, or only having estimated HUDs where the final HUD1 was not used to test for high cost loans. To mitigate this risk, Fitch assumed a 100% LS for loans in the states that fall under Freddie Mac's 'do not purchase' list of high cost or 'high risk.' 21 loans were impacted by this approach.

For the remaining 101 loans, where the properties are not located in the states that fall under Freddie Mac's 'do not purchase' list, the likelihood of all loans being high cost is lower. However, Fitch assumes the trust could potentially incur additional legal expenses. Fitch increased its LS expectations by 5% for these loans to account for the risk.

There were 71 loans missing modification documents or a signature on modification documents. For these loans, timelines were extended by an additional three months, in addition to the six-month timeline extension applied to the entire pool.

The statute of limitations had not expired for one loan for TILA. As a result, Fitch increased its loss severity expectations by 5% for this loan to account for the risk of the possibility of challenges to foreclosure and associated legal costs.

Twelve loans did not receive a compliance review due to incomplete loan files. Fitch assumed a 100% loss on these loans due to the potential risk for high cost issues and assignee liability.

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 accessing the appendix referenced under 'Related Research' below. 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,' dated May 2016.