NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to the Sequoia Mortgage Trust 2014-4 (SEMT 2014-4):
--$223,601,000 class A-1 certificate 'AAAsf'; Outlook Stable;
--$223,601,000 class A-2 exchangeable certificate 'AAAsf'; Outlook Stable;
--$74,534,000 class A-3 certificate 'AAAsf'; Outlook Stable;
--$21,685,000 class A-4 certificate 'AAAsf'; Outlook Stable;
--$319,820,000 class A-5 exchangeable certificate 'AAAsf'; Outlook Stable;
--$298,135,000 class A-6 exchangeable certificate 'AAAsf'; Outlook Stable;
--$319,820,000 class A-IO notional certificate 'AAAsf'; Outlook Stable;
--$223,601,000 class A-IO1 notional certificate 'AAAsf'; Outlook Stable;
--$319,820,000 class A-IO2 notional certificate 'AAAsf'; Outlook Stable;
--$6,830,000 class B-1 certificate 'AAsf'; Outlook Stable;
--$5,464,000 class B-2 certificate 'Asf'; Outlook Stable;
--$4,099,000 class B-3 certificate 'BBBsf'; Outlook Stable;
--$1,878,000 non-offered class B-4 certificate 'BBsf'; Outlook Stable.
The $3,415,351 non-offered class B-5 certificate is not rated by Fitch.
The 'AAAsf' rating on the senior certificates reflects the 6.35% subordination provided by the 2.00% class B-1, 1.60% class B-2, 1.20% class B-3, 0.55% non-offered class B-4 and 1.00% non-offered class B-5. The class B-5 is not rated by Fitch. The class A-7 through A-29 and class A-IO3 and A-IO4 that were presented at the time of marketing will not be issued, and as a result, Fitch has withdrawn its ratings.
KEY RATING DRIVERS
Strong Collateral Attributes: The collateral pool consists of 30-year, fixed-rate, fully documented loans to borrowers with strong credit profiles, low leverage and substantial liquid reserves. Third-party, loan-level due diligence was conducted on 82% of the pool, the results of which, in Fitch's opinion, indicate strong underwriting controls.
Inclusion of Non-QM Loans: Of the total pool, 472 loans, or 98.5%, on primary or secondary residences have application dates of Jan. 10, 2014 or later and are, therefore, subject to the Ability-to-Repay (ATR)/Qualified Mortgage (QM) Rule. Of these, eight loans were originated as non-QM, resulting in a negligible increase to the pool's 'AAAsf' loss severity (LS), representing roughly 2% of the pool. The remaining 98% were classified as safe harbor QM (SHQM), for which no adjustment was made, or were not subject to the ATR/QM Rule.
No Geographic Concentration Penalty: The pool is well diversified geographically with the top 10 metropolitan statistical areas (MSAs) comprising less than 50% of the pool. As a result, Fitch did not apply a penalty to the pool's lifetime default expectations. The pool's largest concentration is in the San Francisco MSA (12.5%), followed by Cambridge (5.1%). Compared to the prior two SEMT transactions, SEMT 2014-4 is less concentrated in Seattle, primarily on account of the reduced contribution from Homestreet Bank.
Market Value Decline Sensitivity: Fitch's sustainable home price (SHP) model suggests home prices for the pool are overvalued by roughly 21.1%, which results in an 'Asf' sustainable market value decline (sMVD) stress above the recent national housing recession's peak-to-trough experience. A sensitivity analysis was factored into Fitch's analysis to better align its sMVD stress to recent observations, which resulted in applying a base sMVD of 16.9%.
Quality Aggregator and Primary Originator: Fitch has reviewed Redwood Residential Acquisition Corporation (Redwood) as an aggregator and First Republic Bank (FRB), the largest contributing originator to the pool, as an originator and considers both to be above average. Fitch factored these qualitative strengths in its loss expectations. Fitch believes that Redwood's sound acquisition strategy is also reflected in the very strong performance of the post-crisis Sequoia pools. Similarly, Fitch considers FRB's low delinquency and default rates on its securitized loans supportive of its view on the quality of FRB's origination platform.
Cash Flow Structure: The transaction features a traditional senior-subordinate, shifting-interest structure. Furthermore, the trust provides for expenses, including indemnification amounts and costs of arbitration, to be paid by the net weighted average coupon (WAC) of the loans, which does not impact the contractual interest due on the certificates.
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 base case projected 16.9% for this pool. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.
Fitch's stress and rating sensitivity analysis are discussed in its presale report released today 'Sequoia Mortgage Trust 2014-4', available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
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 from the 17g5 website available on 'www.structuredfn.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 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);
--'U.S. RMBS Qualified and Non-Qualified Mortgage Criteria' (March 2014).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
U.S. RMBS Master Rating Criteria
U.S. RMBS Loan Loss Model Criteria
U.S. RMBS Cash Flow Analysis Criteria
Rating Criteria for US Residential and Small Balance Commercial Mortgage Servicers
U.S. RMBS Surveillance and Re-REMIC Criteria
U.S. RMBS Qualified and Non-Qualified Mortgage Criteria