Fitch Expects to Rate J.P. Morgan Mortgage Trust 2014-5; Presale Issued

NEW YORK--()--Fitch Ratings expects to rate J.P. Morgan Mortgage Trust 2014-5 as follows:

--$236,006,000 class A-1 exchangeable certificates 'AAAsf'; Outlook Stable;

--$236,006,000 class A-2 exchangeable certificates 'AAAsf'; Outlook Stable;

--$185,759,000 class A-3 exchangeable certificates 'AAAsf'; Outlook Stable;

--$185,759,000 class A-4 certificates 'AAAsf'; Outlook Stable;

--$50,247,000 class A-5 exchangeable certificates 'AAAsf'; Outlook Stable;

--$50,247,000 class A-6 exchangeable certificates 'AAAsf'; Outlook Stable;

--$16,749,000 class A-7 exchangeable certificates 'AAAsf'; Outlook Stable;

--$16,749,000 class A-8 certificates 'AAAsf'; Outlook Stable;

--$33,498,000 class A-9 exchangeable certificates 'AAAsf'; Outlook Stable;

--$33,498,000 class A-10 certificates 'AAAsf'; Outlook Stable;

--$14,816,000 class A-11 exchangeable certificates 'AAAsf'; Outlook Stable;

--$14,816,000 class A-12 certificates 'AAAsf'; Outlook Stable;

--$250,822,000 class A-X-1 notional certificates 'AAAsf'; Outlook Stable;

--$250,822,000 class A-X-2 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$250,822,000 class A-X-3 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$236,006,000 class A-X-4 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$14,816,000 class A-X-5 notional certificates 'AAAsf'; Outlook Stable;

--$185,759,000 class A-X-6 notional certificates 'AAAsf'; Outlook Stable;

--$16,749,000 class A-X-7 notional certificates 'AAAsf'; Outlook Stable;

--$33,498,000 class A-X-8 notional certificates 'AAAsf'; Outlook Stable;

--$50,247,000 class A-X-9 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$3,803,000 class B-1 certificates 'AAsf'; Outlook Stable;

--$3,015,000 class B-2 certificates 'Asf'; Outlook Stable;

--$2,229,000 class B-3 certificates 'BBBsf'; Outlook Stable;

--$787,000 class B-4 certificates 'BBsf'; Outlook Stable.

The $1,573,671 class B-5 certificates will not be rated.

KEY RATING DRIVERS

Exclusive 15-Year Mortgages: The collateral pool consists of 15-year fixed-rate mortgages (FRMs) to borrowers with very strong credit profiles, low leverage and substantial liquid reserves. Third-party loan-level due diligence was performed on 100% of the pool, and Fitch believes the results of the review generally indicate strong underwriting controls. Fitch's probability of default (PD) for 15-year FRMs is lower than that for loans with 30-year terms to reflect the positive selection associated with borrowers who select the higher payment, which results in faster amortization.

Small Loan Count Risk: Transactions with a small number of loans carry the risk that portfolio performance may be negatively affected by a few assets that underperform relative to the statistically derived assumptions underlying their ratings. While total loan count in this pool is 373, the weighted average number of loans (WAN) is 271. This resulted in an 11% penalty on the PD.

High Geographic Concentration: The pool's primary concentration risk is California, where 48% of the properties are located. In addition, 50.6% of the properties are located in the pool's top five metropolitan statistical areas (MSA) in California, New York and Illinois. The pool has significant regional concentrations, which resulted in an additional penalty of approximately 7% to the pool's lifetime default expectation.

Extraordinary Expense Adjustment: Extraordinary expenses will be taken out of available funds and not accounted for in the contractual interest owed to the bondholders. This construct can result in principal and interest shortfalls to the bonds starting from the bottom of the capital structure. To account for this risk, Fitch adjusted the credit enhancement (CE) upward by 25 bps for the class A bonds, 20 bps for classes B-1 and B2 and 10 bps for classes B-3 and B-4.

Non-full Representation and Warranty Framework: While the transaction benefits from JPMCB ('A+'/Stable Outlook/'F'1) and FRB ('A-/Stable Outlook/'F1') as representation and warranty (rep and warranty) providers for approximately 91% of the pool, Fitch believes the value of the rep and warranty framework is diluted by the presence of qualifying and conditional language in conjunction with sunset provisions, which reduces lender breach liability. While the agency believes the high credit quality pool and clean diligence results mitigate these risks, Fitch considered the weaker framework in its analysis.

Market Value Decline Sensitivity: Fitch considered further market value decline (MVD) sensitivities, in addition to those generated by its sustainable home price (SHP) model. These scenarios aligned Fitch's 'Asf' sustainable MVD (sMVD) assumptions with peak-to-trough MVDs experienced during the housing crisis through 2009. The sensitivity analysis, which was factored into Fitch's loss expectations, resulted in applying a sMVD of 18.3% from 23% using the first-quarter 2014 Case-Schiller home price data.

RATING SENSITIVITIES

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 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 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 market value declines 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 (published December 2013 and available 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 18.3% from 23% using the first-quarter 2014 Case-Schiller home price data.

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 23% 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 4%, 21% and 37% 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 'J.P. Morgan Mortgage Trust 2014-5', published October 2014, which is available at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Global Structured Finance Rating Criteria' (August 2014)

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);

--'U.S. RMBS Master Rating Criteria' (July 2014);

--'U.S. RMBS Loan Loss Model Criteria' (December 2013);

--'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).

Applicable Criteria and Related Research: J.P. Morgan Mortgage Trust 2014-5 (US RMBS)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=798148

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=903634

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Contacts

Fitch Ratings
Primary Analyst
Christine Yan
Director
+1-212-908-0838
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY
or
Secondary Analyst
Matthew Shaw
Analyst
+1-212-908-0218
or
Committee Chairperson
Grant Bailey
Managing Director
+1-212-908-0544
or
Media Relations:
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christine Yan
Director
+1-212-908-0838
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY
or
Secondary Analyst
Matthew Shaw
Analyst
+1-212-908-0218
or
Committee Chairperson
Grant Bailey
Managing Director
+1-212-908-0544
or
Media Relations:
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com