The following classes will not be rated by Fitch:
The 'BBBsf' rating for the M-1 notes reflects the 4.27% subordination provided by the 1.23% class M-2 notes, the 1.02% class M-3A notes, the 1.03% class M-3B and the 1.00% class B notes. The 'BBB-sf' rating for the M-2 notes reflects the 3.05% subordination provided by the 1.02% class M-3A notes, the 1.03% class M-3B notes and the 1.00% class B notes. The notes are general unsecured obligations of Freddie Mac ('
STACR 2016-HQA4 represents Freddie Mac's 13th risk transfer transaction applying actual loan loss severity (LS) issued as part of the
The objective of the transaction is to transfer credit risk from Freddie Mac to private investors with respect to a
While the transaction structure simulates the behavior and credit risk of traditional RMBS senior-subordinate securities, Freddie Mac will be responsible for making monthly payments of interest and principal to investors. Because of the counterparty dependence on Freddie Mac, Fitch's expected rating on the M-1, M-2, M-2F, M-2I, M-3A, M-3AF, M-3AI, M-3B and M-3 notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement (CE) available through subordination, and Freddie Mac's Issuer Default Rating. The M-1, M-2, M-3A, M-3B and B notes will be issued as uncapped LIBOR-based floaters and will carry a 12.5-year legal final maturity.
KEY RATING DRIVERS
Mortgage Insurance Guaranteed by Freddie Mac (Positive): 99.9% of the loans are covered either by borrower paid mortgage insurance (BPMI) or lender-paid MI (LPMI). Loans without MI coverage are either originated in
Freddie Mac will guarantee the 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 Freddie Mac 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%.
Increased LTV (Concern): Starting with this transaction, Freddie Mac has increased its LTV parameter on its greater than 80% LTV credit risk transfer transactions to include loans with LTVs up to 97% from 95%. Fitch believes the increase in credit risk to the overall pool is modest due to the relatively small size of the loans included. Approximately 1.4% of the pool has an original LTV greater than 95%.
Actual Loss Severities (Neutral): This will be Freddie Mac's sixth actual loss risk transfer transaction in which losses borne by the noteholders will not be based on a fixed loss severity (LS) schedule on loans with LTVs of over 80%. The notes in this transaction will experience losses realized at the time of liquidation, which will include both principal and delinquent interest.
Solid Lender Review and Acquisition Processes (Positive): Fitch found that Freddie Mac has a well-established and disciplined process in place for the purchase of loans and views its lender approval and oversight processes for minimizing counterparty risk and ensuring sound loan quality acquisitions as positive. Loan quality control (QC) review processes are thorough and indicate a tight control environment that limits origination risk. Fitch has determined Freddie Mac to be an above-average aggregator for its 2013 and later product. The lower risk was accounted for by Fitch by applying a lower default estimate for the reference pool.
Advantageous Payment Priority (Positive): The M-1 class strongly benefits from the sequential pay structure and stable CE provided by the more junior M-2, M-3A, M-3B and B 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 M-1 class. Given the size of the M-1 class relative to the combined total of all the junior classes, together with the sequential pay structure, the class M-1 will de-lever and CE as a percentage 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 the transaction benefits from solid alignment of interests. Freddie Mac will retain credit risk in the transaction by holding the senior reference tranche A-H, which has 5.50% of loss protection, as well as a minimum of 50% of the first-loss B tranche. Initially, Freddie Mac will retain an approximately 26% vertical slice/interest in the M-1, M-2, M-3A and M-3B 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 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 32.7% at the '
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 move the 'BBBsf' rated class down one rating category, to non-investment grade, to 'CCCsf', respectively.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with due diligence information from the third-party diligence provider. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. The third-party diligence provider 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 our analysis.
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
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 was not prepared for this transaction. Offering documents for
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub.
Global Structured Finance Rating Criteria (pub.
Rating Criteria for
Structured Agency Credit Risk Debt Notes, Series 2016-HQA4 (US RMBS)
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