Fitch Expects to Rate FirstKey Mortgage Trust 2014-1; Presale Issued

NEW YORK--()--Fitch Ratings expects to rate FirstKey Mortgage Trust 2014-1 (FirstKey 2014-1) as follows:

--$25,000,000 class A-1 certificate 'AAAsf'; Outlook Stable;

--$140,286,000 class A-2 certificate 'AAAsf'; Outlook Stable;

--$33,950,000 class A-3 certificate 'AAAsf'; Outlook Stable;

--$12,812,000 class A-4 certificate 'AAAsf'; Outlook Stable;

--$9,982,000 class A-5 certificate 'AAAsf'; Outlook Stable;

--$28,232,000 class A-6 certificate 'AAAsf'; Outlook Stable;

--$9,411,000 class A-7 certificate 'AAAsf'; Outlook Stable;

--$140,286,000 class A-8 exchangeable certificate 'AAAsf'; Outlook Stable;

--$46,762,000 class A-9 exchangeable certificate 'AAAsf'; Outlook Stable;

--$187,048,000 class A-10 exchangeable certificate 'AAAsf'; Outlook Stable;

--$187,048,000 class A-11 exchangeable certificate 'AAAsf'; Outlook Stable;

--$174,236,000 class A-12 exchangeable certificate 'AAAsf'; Outlook Stable;

--$9,982,000 class A-13 exchangeable certificate 'AAAsf'; Outlook Stable;

--$197,030,000 class A-14 exchangeable certificate 'AAAsf'; Outlook Stable;

--$197,030,000 class A-15 exchangeable certificate 'AAAsf'; Outlook Stable;

--$28,232,000 class A-16 exchangeable certificate 'AAAsf'; Outlook Stable;

--$28,232,000 class A-17 exchangeable certificate 'AAAsf'; Outlook Stable;

--$37,643,000 class A-18 exchangeable certificate 'AAAsf'; Outlook Stable;

--$37,643,000 class A-19 exchangeable certificate 'AAAsf'; Outlook Stable;

--$9,411,000 class A-20 exchangeable certificate 'AAAsf'; Outlook Stable;

--$234,673,000 class A-21 exchangeable certificate 'AAAsf'; Outlook Stable;

--$234,673,000 class A-22 exchangeable certificate 'AAAsf'; Outlook Stable;

--$259,673,000 class A-X-1 notional certificate 'AAAsf'; Outlook Stable;

--$140,286,000 class A-X-2 notional certificate 'AAAsf'; Outlook Stable;

--$187,048,000 class A-X-3 notional certificate 'AAAsf'; Outlook Stable;

--$9,982,000 class A-X-4 notional certificate 'AAAsf'; Outlook Stable;

--$28,232,000 class A-X-5 notional certificate 'AAAsf'; Outlook Stable;

--$28,232,000 class A-X-6 notional certificate 'AAAsf'; Outlook Stable;

--$9,411,000 class A-X-7 notional certificate 'AAAsf'; Outlook Stable;

--$197,030,000 class A-X-8 notional exchangeable certificate 'AAAsf'; Outlook Stable;

--$28,232,000 class A-X-9 notional exchangeable certificate 'AAAsf'; Outlook Stable;

--$37,643,000 class A-X-10 notional exchangeable certificate 'AAAsf'; Outlook Stable;

--$37,643,000 class A-X-11 notional exchangeable certificate 'AAAsf'; Outlook Stable;

--$8,151,000 class B-1 certificate 'AAsf'; Outlook Stable;

--$5,290,000 class B-2 certificate 'Asf'; Outlook Stable;

--$5,148,000 class B-3 certificate 'BBBsf'; Outlook Stable;

--$3,718,000 class B-4 certificate 'BBsf'; Outlook Stable.

The $4,004,195 class B-5 certificate is not expected to be rated by Fitch.

KEY RATING DRIVERS

High-Quality Mortgage Collateral: The collateral pool consists of 30-year, fixed-rate, fully amortizing loans to borrowers with strong credit profiles, low leverage and substantial liquid reserves. Third-party, loan-level due diligence was conducted on 100% of the pool with no material findings, indicating strong underwriting controls.

Robust Representation Framework but Weak Provider: The representation, warranty and enforcement mechanism (RW&E) framework is viewed positively by the agency as it is consistent with Fitch's criteria. However, FirstKey does not meet the criteria's financial condition threshold. As a result, Fitch made an adjustment to its loss expectations to account for the possibility of slightly higher defaults and losses arising from FirstKey's inability to repurchase loans due to breaches. The adjustment considered the 100% due diligence review, as well as the high quality of the mortgage loans.

New Issuer with Limited Operating History: This is the first transaction issued by FirstKey Mortgage (FirstKey). FirstKey launched their conduit for non-conforming mortgage business in late 2013 and therefore has a limited and unproven track record of acquiring mortgage loans through either a flow or bulk basis. Fitch conducted an aggregator review and it is Fitch's opinion that FirstKey meets the industry standards needed to source mortgage loans and has an overall assessment of Average.

Originators with Limited Performance History: The loans were originated by lenders with limited non-agency performance history. Though the originators have limited performance history, all of the loans were reviewed by a third-party due diligence firm with immaterial findings, and Fitch believes the credit enhancement (CE) on this transaction is sufficient to mitigate the originator risk.

Safe-Harbor Qualified Mortgages: Of the total pool, 376 loans (approximately 93% of the pool) have application dates of Jan. 10, 2014 or later and are, therefore, subject to the Ability-to-Repay (ATR)/Qualified Mortgage (QM) Rule. All of the loans subject to this rule were classified as safe harbor QM (SHQM), for which no adjustment was made. The remainder of the loans were not subject to the ATR/QM Rule, as their application dates were prior to Jan. 10, 2014.

Geographic Concentration Risk: The top three metropolitan statistical areas (MSAs) account for approximately 39% and are all concentrated in California. The largest concentration at the MSA level is in Los Angeles (17.2%), followed by San Francisco (15.4%) and San Diego (6.0%). To account for the pool's geographic concentration, Fitch applied a penalty of 1.05x to its lifetime default expectations

Market Value Decline Sensitivity: Fitch's sustainable home price (SHP) model suggests home prices for the pool are overvalued by roughly 23.2%, which results in a '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 18.2%.

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.

RATING SENSITIVITIES

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.

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 during the housing crisis through 2009. This is consistent with Fitch's view as described in its U.S. RMBS Loan Loss Model Criteria(dated November 2014 and available on its website at www.fitchratings.com), which associates the recent national housing recession and related performance observations with a '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 18.2% from 23.2%.

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 23.2% 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 'FirstKey Mortgage Trust

2014-1', 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: FirstKey Mortgage Trust 2014-1 (US RMBS)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=815488

Global Structured Finance Rating Criteria - Effective from 24 May 2013 - 20 May 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

U.S. RMBS Master Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750719

U.S. RMBS Loan Loss Model Criteria - Effective 12/23/13 to 11/17/14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727095

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=926115

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst:
Rachel Noonan, +1-212-908-0224
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Vanessa Purwin, +1-212-908-0269
Senior Director
or
Committee Chairperson:
Roelof Slump, +1-212-908-0705
Managing Director
or
Sandro Scenga, +1-212-908-0278
Media Relations, New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Rachel Noonan, +1-212-908-0224
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Vanessa Purwin, +1-212-908-0269
Senior Director
or
Committee Chairperson:
Roelof Slump, +1-212-908-0705
Managing Director
or
Sandro Scenga, +1-212-908-0278
Media Relations, New York
sandro.scenga@fitchratings.com