Fitch Ratings expects to assign the following ratings and Rating Outlooks to Fannie Mae's risk transfer transaction,
The following classes will not be rated by Fitch:
The 'BBB-sf' rating for the 2M-1 note reflects the 3.10% subordination provided by the 0.65% class 2M-2A note, the 1.45% class 2M-2B note and the 1.00% class 2B note, and their corresponding reference tranches. The notes are general senior unsecured obligations of Fannie Mae (rated '
The reference pool of mortgages will consist of mortgage loans with loan-to-value ratios (LTVs) greater than 80.01% and less than or equal to 97.00%.
The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to a
While the transaction structure simulates the behavior and credit risk of traditional RMBS mezzanine and subordinate securities, Fannie Mae will be responsible for making monthly payments of interest and principal to investors. Because of the counterparty dependence on Fannie Mae, Fitch's expected rating on the 2M-1, 2M-2A and 2M-2B notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement (CE) available through subordination; and Fannie Mae's Issuer Default Rating. The notes will be issued as uncapped LIBOR-based floaters and will carry a 12.5-year legal final maturity.
KEY RATING DRIVERS
Actual Loss Severities (Neutral): This will be Fannie Mae's eighth actual loss risk transfer transaction in which losses borne by the noteholders will not be based on a fixed loss severity (LS) schedule. The notes in this transaction will experience losses realized at the time of liquidation or modification, which will include both lost principal and delinquent or reduced interest.
Mortgage Insurance Guaranteed by Fannie Mae (Positive): The majority of the loans in the pool are covered either by borrower-paid mortgage insurance (BPMI) or lender-paid MI (LPMI). Fannie Mae will be guaranteeing the mortgage insurance (MI) coverage amount, which will typically be the MI coverage percentage multiplied by the sum of the unpaid principal balance as of the date of the default, up to 36 months of delinquent interest, taxes, and maintenance expenses. While the Fannie Mae guarantee allows for credit to be given to MI, Fitch applied a haircut to the amount of BPMI available due to the automatic termination provision as required by the Homeowners Protection Act when the loan balance is first scheduled to reach 78%.
Limited Size/Scope of Third-Party Diligence (Neutral): This is the fourth transaction in which Fitch received third-party due diligence on a loan production basis as opposed to a transaction-specific review. Fitch believes that regular, periodic third-party reviews (TPRs) conducted on a loan production basis are sufficient for validating Fannie Mae's quality control (QC) processes. The sample selection was limited to a population of 7,391 loans that were previously reviewed as part of Fannie Mae's post-purchase QC review and met the reference pool's eligibility criteria. Of those loans, 1,998 were selected for a full review (credit, property valuation, and compliance) by third-party due diligence providers. Of the 1,998 loans, 347 were part of this transaction's reference pool. Fitch views the results of the due diligence review as consistent with its opinion of Fannie Mae as an above-average aggregator; as a result, no adjustments were made to Fitch's loss expectations based on due diligence.
Advantageous Payment Priority (Positive): The 2M-1 class strongly benefits from the sequential pay structure and stable CE provided by the more junior 2M-2A, 2M-2B, and 2B classes which are locked out from receiving any principal until classes with a more senior payment priority are paid in full. However, available CE for the junior classes as a percentage of the outstanding reference pool increases in tandem with the paydown of the 2M-1 class. Given the size of the 2M-1 class relative to the combined total of all the junior classes, together with the sequential pay structure, the class 2M-1 will de-lever and CE as a percentage of the outstanding balance for the remaining junior classes will build faster than in a pro rata payment structure.
Solid Alignment of Interests (Positive): While the transaction is designed to transfer credit risk to private investors, Fitch believes that it benefits from a solid alignment of interests. Fannie Mae will be retaining credit risk in the transaction by holding the 2A-H senior reference tranches, which have an initial loss protection of 4.00%, as well as at least 50% of the first loss 2B-H reference tranche, sized at 73 basis points (bps). Fannie Mae is also retaining an approximately 5% vertical slice/interest in the 2M-1, 2M-2A, and 2M-2B tranches.
Receivership Risk Considered (Neutral): Under the
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.
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 23.4% at the 'BBBsf' level and 18.6% at the 'BBsf' level. The analysis indicates that there is some potential rating migration with higher MVDs, compared with the model projection.
Fitch also conducted defined rating sensitivities which determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'. For example, additional MVDs of 11%, 11% and 35% would potentially reduce the 'BBBsf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from Adfitech, Inc. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. Adfitech examined selected loan files with respect to the presence or absence of relevant documents. Fitch received certifications indicating that the loan-level due diligence was conducted in accordance with Fitch's published standards. The certifications also stated that the company performed its work in accordance with the independence standards, per Fitch's criteria, and that the due diligence analysts performing the review met Fitch's criteria of minimum years of experience. Fitch considered this information in its analysis and the findings did not have an impact on the analysis.
The offering documents for CAS 2016-C07 do not disclose any representations, warranties, or enforcement mechanisms (RW&Es) that are available to investors and which relate to the underlying asset pools. Please see Fitch's Special Report for further information regarding Fitch's approach to the disclosure of a transaction's RW&Es as required under SEC Rule 17g-7.
Additional information is available at www.fitchratings.com.
Sources of Information:
In addition to the information sources identified in Fitch's criteria listed below, Fitch's analysis incorporated data tapes, due diligence results, deal structure and legal documents provided by Fannie Mae.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01
Global Structured Finance Rating Criteria (pub.
Rating Criteria for
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc.,
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from
Source: Fitch Ratings