NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to Morgan Stanley Residential Mortgage Loan Trust 2014-1:
--$229,291,000 class A-1 exchangeable certificates 'AAAsf'; Outlook Stable;
--$206,362,000 class A-2 depositable certificates 'AAAsf'; Outlook Stable;
--$22,929,000 class A-3 depositable certificates 'AAAsf'; Outlook Stable;
--$8,336,000 class B-1 certificates 'AAsf'; Outlook Stable;
--$7,181,000 class B-2 certificates 'Asf'; Outlook Stable;
--$4,874,000 class B-3 certificates 'BBBsf'; Outlook Stable;
--$2,564,000 class B-4 certificates 'BBsf'; Outlook Stable;
The $4,232,741 class B-5 certificates will not be rated.
KEY RATING DRIVERS
High Quality Mortgage Pool: The collateral pool consists of 291 seven year hybrid adjustable-rate mortgages (ARM) totaling approximately $256.5 million made to borrowers with strong credit profiles, low leverage, and substantial liquid reserves. All of the loans were originated by First Republic Bank (FRB), which Fitch considers to be an above-average originator of prime jumbo product. Third-party, loan-level due diligence was conducted on 100% of the pool with minimal findings indicating strong underwriting controls.
Payment Shock Exposure: The pool consists entirely of ARM loans while more than half also have interest-only (IO) features originated prior to January 2014. Loan products that result in periodic changes in a borrower's payment such as ARMs and IOs expose borrowers to payment reset risk. Future rises in interest rates and payment re-amortization after the expiration of interest only periods can increase monthly payments considerably. To account for this risk, Fitch applied a probability of default (PD) penalty of approximately 1.60x to the ARM loans without IO terms and 1.76x to those with IO features.
High Geographic Concentration: The pool's primary concentration risk is California where 65.30% of the properties are located. Additionally, 46.00% of the pool is secured by properties in the San Francisco metropolitan statistical area (MSA), reflective of FRB's strong footprint in the area. The top five MSAs, which are in California, New York, and Massachusetts, comprise approximately 83.9% of the pool. The significant geographic concentrations resulted in an increase in the lifetime default expectations for the pool of around 1.87x.
Documentation Adjustment: For borrowers who have accounts with FRB with reserves that meet a certain threshold, FRB's asset verification process consists of capturing a screenshot of the borrower's account, which is categorized as 'Stated, Partially Verified' on the American Securitization Forum's (ASF) loan tape provided by the sponsor. However, because FRB has a complete record of these borrowers' assets and reserves, Fitch considered the assets for these loans to be fully verified in its analysis. This adjustment impacted 150 loans (51.5% of the pool) and resulted in a decrease in the pool's 'AAAsf' expected loss by roughly 50 basis points (bps).
Seasoned Property Value Exception: Under Fitch's 'U.S. RMBS Master Criteria' dated July 1, 2014, the agency expects property valuations to be no more than 12 months old at the time of securitization. However, the transaction includes 22 loans for which the valuations are between 13 - 16 months old and 13 loans with valuations aged 16 - 18 months. Fitch did not deem adjustments to these loans' original property values necessary because all of them are secured by properties in areas that have experienced home prices increases over the past 18 months. Given the strong loan attributes and borrower profiles, in Fitch's view it is unlikely that these properties experienced price depreciation or deterioration in their condition.
Small Loan Count: While total loan count in this pool is 291, the weighted average number of loans (WAN) is 218. Transactions with a small number of loans carry the risk that portfolio performance may be adversely impacted by a few assets that underperform relative to the statistically derived assumptions underlying their ratings. Therefore, Fitch applied a penalty of approximately 1.18x to the pool's lifetime default expectations to account for this risk.
After Fitch determines credit ratings through a rating stress scenario analysis, additional sensitivity analyses are considered. The analyses provide a defined stress sensitivity to demonstrate how the ratings would react to steeper market value declines (MVDs) than that assumed at issuance as well as a defined sensitivity that demonstrates the stress assumptions required to reduce a rating by one full category, to non-investment grade, and to 'CCCsf'.
In its analysis, Fitch considered additional sustainable MVD (sMVD) stress assumptions to those generated by the SHP model. These supplementary scenarios reflected base case sMVDs that aligned Fitch's 'Asf' sMVD stress assumptions with peak-to-trough MVDs experienced in the U.S. during the recent financial crisis (2007 - 2009). This is consistent with Fitch's view as described in its U.S. RMBS Loan Loss Model Criteria (dated December 2013, available on its website at www.fitchratings.com) which associates the recent national housing recession and related performance observations with an 'Asf' stress. The result of this sensitivity analysis was included in the consideration of the loss expectations for this transaction. The sensitivity analysis resulted in a base sMVD of 19.4%, compared with the model projected 22.2%.
Another sensitivity analysis was focused on 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 19.4% for this pool. The analysis indicates 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 5%, 24% and 48% would potentially reduce the 'AAAsf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively.
Fitch's stress and rating sensitivity analysis are discussed in the presale report titled ' Morgan Stanley Residential Mortgage Loan Trust 2014-1', dated August 2014, which is available on Fitch's web site, www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Global Structured Finance Rating Criteria' (August 2014);
--'U.S. RMBS Loan Loss Model Criteria' (December 2013);
--'U.S. RMBS Master Rating Criteria' (July 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);
--'U.S. RMBS Cash Flow Analysis Criteria' (April 2014);
--'Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers' (January 2014);
--'U.S. RMBS Surveillance and Re-REMIC Criteria' (June 2014);
--'U.S. RMBS Qualified and Non-Qualified Mortgage Criteria' (March 2014).
Applicable Criteria and Related Research:
U.S. RMBS Surveillance and Re-REMIC Criteria
Global Structured Finance Rating Criteria
U.S. RMBS Loan Loss Model Criteria
U.S. RMBS Master Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
U.S. RMBS Cash Flow Analysis Criteria
Rating Criteria for US Residential and Small Balance Commercial Mortgage Servicers
U.S. RMBS Qualified and Non-Qualified Mortgage Criteria