NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings and Rating Outlooks to Fannie Mae's seventh risk transfer transaction, Connecticut Avenue Securities, series 2015-C02:
--$266,000,000 class 1M-1 notes 'BBB-sf'; Outlook Stable.
--$226,200,000 class 2M-1 notes 'BBB-sf'; Outlook Stable.
The following classes will not be rated by Fitch:
--$26,951,700,321 class 1A-H reference tranche;
--$14,017,666 class 1M-1H reference tranche;
--$625,100,000 class 1M-2 notes;
--$32,941,514 class 1M-2H reference tranche;
--$112,007,067 class 1B-H reference tranche;
--$16,284,533,874 class 2A-H reference tranche;
--$11,902,845 class 2M-1H reference tranche;
--$331,200,000 class 2M-2 notes;
--$17,450,595 class 2M-2H reference tranche;
--$136,058,769 class 2B-H reference tranche.
The 'BBB-sf' rating for the 1M-1 notes reflects the 2.75% subordination provided by the 2.35% class 1M-2 notes and the non-offered 0.40% 1B-H reference tranche. The 'BBB-sf' rating for the 2M-1 notes reflects the 2.85% subordination provided by the 2.05% class 2M-2 notes and the non-offered 0.80% 2B-H reference tranche. The notes are general senior unsecured obligations of Fannie Mae (rated 'AAA'; Outlook Stable by Fitch) subject to the credit and principal payment risk of a pool of certain residential mortgage loans held in various Fannie Mae-guaranteed MBS.
The reference pool of mortgages will be divided into two loan groups. Group 1 will consist of mortgage loans with loan-to-values (LTVs) of less than or equal to 80% while group 2 will consist of mortgage loans with LTVs greater than 80% and less than or equal to 97%. Each loan group has its own loss severity schedule and issued notes. There will be no cross-collateralization. Aside from distinct loss severity schedules, each group's structure will be identical.
Connecticut Avenue Securities, series 2015-C02 (CAS 2015-C02) is Fannie Mae's seventh risk transfer transaction issued as part of the Federal Housing Finance Agency's Conservatorship Strategic Plan for 2013-2017 for each of the government sponsored enterprises (GSEs) to demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages.
The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to a $45 billion pool of mortgage loans currently held in previously issued MBS guaranteed by Fannie Mae where principal repayment of the notes are subject to the performance of a reference pool of mortgage loans. As loans become 180-days delinquent or other credit events occur, the outstanding principal balance of the debt notes will be reduced by a pre-defined, tiered loss severity percentage related to those credit events.
While the transaction structure simulates the behavior and credit risk of traditional RMBS mezzanine and subordinate securities, Fannie Mae will be responsible for making monthly payments of interest and principal to investors. Because of the counterparty dependence on Fannie Mae, Fitch's expected rating on the 1M-1 and 2M-1 notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement available through subordination; and Fannie Mae's Issuer Default Rating. The 1M-1 and 2M-1 notes will be issued as uncapped LIBOR-based floaters and will carry a 10-year legal final maturity.
KEY RATING DRIVERS
Slight Credit Drift: The subject pool for both Group 1 and 2 are showing slight credit drift from the prior CAS 2015-C01 transaction. The drifts can be seen in the weighted average (WA) FICO score of 747, compared with 753 in Group 1, and 745, compared with 749 in Group 2. In addition, the percentage of loans that experienced a 1 x 30 days delinquency over the past 24 months has increased for Group 1 and 2 to 1.8% and 1.4%, respectively, from 1.1% and 1.0%.
Higher Concentration in Overvalued Regions: The properties in the subject pools are slightly more concentrated in regions with higher sustainable market value declines (sMVDs), compared with the prior transaction. The base sMVD in Group 1 increased to 6.5% from 5.5% and, in Group 2, increased to 5.2% from 4.3%. Another contributing factor to the higher sMVDs is that the Case Shiller home price index has increased at a faster pace than that supported by economic fundamentals for some of these regions. For example, one of the top five metropolitan statistical areas (MSAs) is Los Angeles, which now has a base sMVD of 11.4% versus 9.8% in the prior quarter.
Fixed Loss Severity: One of the unique structural features of the transaction is a fixed loss severity (LS) schedule tied to cumulative net credit events. If actual loan LS is above the set schedule, Fannie Mae absorbs the higher losses. Fitch views the fixed LS positively, as it reduces the uncertainty that may arise due to future changes in Fannie Mae's loss mitigation or loan modification policies. The fixed severity also offers investors greater protection against natural disaster events where properties are severely damaged, as well as in cases of limited or no recourse to insurance.
10-Year Hard Maturity: The 1M-1, 1M-2, 2M-1 and 2M-2 notes benefit from a 10-year legal final maturity. As a result, any collateral losses on the reference pool that occur beyond year 10 are borne by Fannie Mae and do not affect the transaction. Fitch accounted for the 10-year hard maturity in its default analysis and applied a 10% reduction to its lifetime default expectations.
Advantageous Payment Priority: The payment priority of M-1 notes will result in a shorter life and more stable CE than mezzanine classes in private-label (PL) RMBS, providing a relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full pro-rata share of the pool's unscheduled principal payment until year 10, the M-1 notes can receive a full pro-rata share of unscheduled principal immediately, as long as a minimum CE level is maintained. Additionally, unlike PL mezzanine classes, which lose subordination over time due to scheduled principal payments to more junior classes, the M-2 and B-H classes in each group will not receive any scheduled or unscheduled allocations until their M-1 classes are paid in full. The B-H classes will not receive any scheduled or unscheduled principal allocations until the M-2 classes are paid in full.
Limited Size/Scope of Third-Party Diligence: Only 608 loans of those eligible to be included in the reference pool were selected for a full review (credit, property valuation and compliance) by a third-party diligence provider. Of the 608 loans, 509 were part of this transaction's reference pool (317 in Group 1 and 192 in Group 2). The sample selection was limited to a population of 8,812 loans that were previously reviewed by Fannie Mae and met the reference pool's eligibility criteria. Furthermore, the third-party due diligence scope was limited to reflect Fannie Mae's post-close loan review for compliance. Fitch's review of Fannie Mae's risk management and quality control (QC) process/infrastructure, which has been significantly improved over the past several years, indicates a robust control environment that should minimize loan quality risk.
Solid Alignment of Interests: While the transaction is designed to transfer credit risk to private investors, Fitch believes that it benefits from a solid alignment of interests. Fannie Mae will be retaining credit risk in the transaction by holding the A-H senior reference tranches, which have a loss protection of 3.75% in Group 1 and 4.25% in Group 2, as well as the first loss B-H reference tranches, sized at 40 basis points (bps) and 80 bps, respectively. Fannie Mae is also retaining an approximately 5% vertical slice/interest in the M-1 and M-2 tranches for Group 1 and 2, respectively.
Rep and Warranty Gaps: While the loan defect risk for 2015-C02 is notably lower than for agency and non-agency mortgage pools securitized prior to 2009, Fitch believes the risk is greater for this transaction than for recently issued U.S. PL RMBS. Notably, neither Fannie Mae nor an independent third party will conduct loan file reviews for credit events, and Fannie Mae will not conduct any reviews of loans from a seller once it files for bankruptcy. Fitch incorporated this risk into its analysis by treating all historical repurchases as if they were defaulted loans that were not repurchased. Consequently, the rating analysis includes an assumption that the loans will experience defect rates consistent with historical rates, and that those defects will not be repurchased.
Special Hazard Leakage Slightly Mitigated: Starting from the prior transaction, CAS 2015-C01, a reversal of a credit event is now permissible if the borrower subject to a special hazard event becomes current at the end of a forbearance period following the event. While bondholders would experience temporary principal writedowns and lower interest payments during this period, Fitch views this feature slightly more positively relative to earlier CAS transactions, since the reduction in credit protection for temporary borrower delinquencies arising from natural disasters that typically cure may be reversed.
Receivership Risk Considered: Under the Federal Housing Finance Regulatory Reform Act, the Federal Housing Finance Agency (FHFA) must place Fannie Mae into receivership if it determines that Fannie Mae's assets are less than its obligations for more than 60 days following the deadline of its SEC filing, as well as for other reasons. As receiver, FHFA could repudiate any contract entered into by Fannie Mae if it is determined that the termination of such contract would promote an orderly administration of Fannie Mae's affairs. Fitch believes that the U.S. government will continue to support Fannie Mae, which is reflected in its current rating of Fannie Mae. However, if, at some point, Fitch views the support as being reduced and receivership likely, the ratings of Fannie Mae could be downgraded and the M-1 notes' ratings affected.
RATING SENSITIVITIES
Fitch's analysis incorporates sensitivity analyses to demonstrate how the ratings would react to steeper 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 market value declines of 10%, 20%, and 30%, in addition to the model projected 23.7% at the 'BBB-sf' level% for Group 1 and 22.6% at the 'BBB-sf' level for Group 2. The analysis indicates that 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 11%, 7% and 29% would potentially reduce the 'BBB-sf' rated class 1M-1 down one rating category, to non-investment grade, and to 'CCCsf', respectively.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from Clayton Holdings LLC (Clayton). The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. Fitch considered this information in its analysis and the findings did not have an impact on our analysis.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 09 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863276
Global Structured Finance Rating Criteria (pub. 31 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268
Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864368
U.S. RMBS Cash Flow Analysis Criteria (pub. 06 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863973
U.S. RMBS Loan Loss Model Criteria (pub. 17 Nov 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=810788
U.S. RMBS Master Rating Criteria (pub. 01 Jul 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750719
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 24 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750110
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985425
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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