Fitch Expects to Rate Agate Bay Mortgage Trust 2015-4; Presale Issued

NEW YORK--()--Fitch Ratings expects to rate Agate Bay Mortgage Trust 2015-4 as follows:

$166,547,000 class A-21 certificates 'AAAsf'; Outlook Stable;

$11,103,000 class A-22 certificates 'AAAsf'; Outlook Stable;

$44,412,000 class A-23 certificates 'AAAsf'; Outlook Stable;

$15,429,000 class A-24 certificates 'AAAsf'; Outlook Stable;

$237,491,000 class A-X-1 notional certificates 'AAAsf'; Outlook Stable;

$166,547,000 class A-X-18 notional certificates 'AAAsf'; Outlook Stable;

$166,547,000 class A-X-19 notional certificates 'AAAsf'; Outlook Stable;

$11,103,000 class A-X-20 notional certificates 'AAAsf'; Outlook Stable;

$11,103,000 class A-X-21 notional certificates 'AAAsf'; Outlook Stable;

$44,412,000 class A-X-22 notional certificates 'AAAsf'; Outlook Stable;

$44,412,000 class A-X-23 notional certificates 'AAAsf'; Outlook Stable;

$15,429,000 class A-X-24 notional certificates 'AAAsf'; Outlook Stable;

$15,429,000 class A-X-25 notional certificates 'AAAsf'; Outlook Stable;

$5,058,000 class B-1 certificates 'AAsf'; Outlook Stable;

$3,415,000 class B-2 certificates 'Asf'; Outlook Stable;

$2,908,000 class B-3 certificates 'BBB'sf'; Outlook Stable;

$2,024,000 class B-4 certificates 'BBsf'; Outlook Stable.

Exchangeable certificates:

$237,491,000 class A-1 exchangeable certificates 'AAAsf'; Outlook Stable;

$237,491,000 class A-2 exchangeable certificates 'AAAsf'; Outlook Stable;

$237,491,000 class A-3 exchangeable certificates 'AAAsf'; Outlook Stable;

$222,062,000 class A-4 exchangeable certificates 'AAAsf'; Outlook Stable;

$222,062,000 class A-5 exchangeable certificates 'AAAsf'; Outlook Stable;

$222,062,000 class A-6 exchangeable certificates 'AAAsf'; Outlook Stable;

$166,547,000 class A-7 exchangeable certificates 'AAAsf'; Outlook Stable;

$166,547,000 class A-8 exchangeable certificates 'AAAsf'; Outlook Stable;

$177,650,000 class A-9 exchangeable certificates 'AAAsf'; Outlook Stable;

$177,650,000 class A-10 exchangeable certificates 'AAAsf'; Outlook Stable;

$177,650,000 class A-11 exchangeable certificates 'AAAsf'; Outlook Stable;

$55,515,000 class A-12 exchangeable certificates 'AAAsf'; Outlook Stable;

$55,515,000 class A-13 exchangeable certificates 'AAAsf'; Outlook Stable;

$55,515,000 class A-14 exchangeable certificates 'AAAsf'; Outlook Stable;

$44,412,000 class A-15 exchangeable certificates 'AAAsf'; Outlook Stable;

$44,412,000 class A-16 exchangeable certificates 'AAAsf'; Outlook Stable;

$11,103,000 class A-17 exchangeable certificates 'AAAsf'; Outlook Stable;

$11,103,000 class A-18 exchangeable certificates 'AAAsf'; Outlook Stable;

$15,429,000 class A-19 exchangeable certificates 'AAAsf'; Outlook Stable;

$15,429,000 class A-20 exchangeable certificates 'AAAsf'; Outlook Stable;

$237,491,000 class A-X-2 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$237,491,000 class A-X-3 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$237,491,000 class A-X-4 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$222,062,000 class A-X-5 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$222,062,000 class A-X-6 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$222,062,000 class A-X-7 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$166,547,000 class A-X-8 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$177,650,000 class A-X-9 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$177,650,000 class A-X-10 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$177,650,000 class A-X-11 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$55,515,000 class A-X-12 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$55,515,000 class A-X-13 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$55,515,000 class A-X-14 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$44,412,000 class A-X-15 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$11,103,000 class A-X-16 exchangeable notional certificates 'AAAsf'; Outlook Stable;

$15,429,000 class A-X-17 exchangeable notional certificates 'AAAsf'; Outlook Stable.

The $2,023,473 class B-5 certificates and $252,919,473 class A-IO-S notional certificates will not be rated.

KEY RATING DRIVERS

High-Quality Mortgage Pool: The collateral pool consists of very high-quality 30-year, fixed-rate, fully amortizing loans to borrowers with strong credit profiles, low leverage and liquid reserves. The pool has a weighted average (WA) FICO score of 775 and an original combined loan-to-value (CLTV) ratio of 64%. While the average amount of liquid reserves is lower for this pool relative to other recent transactions with comparable profiles, over 20% of the borrowers have reserves in excess of 30% of their mortgage amount.

Geographic Concentration Risk: The pools' primary concentration risk is California, where 49.7% of the properties are located. In addition, the metropolitan areas encompassing San Francisco, Los Angeles and San Jose combine for 38.5% of the collateral balance and represent three of the top 10 regions. The regional concentration resulted in an additional penalty to the pool's probability of default (PD) of roughly 13% to its lifetime default expectation.

Small Loan-Count Risk: While the total loan count in this pool is 319, the WA number of loans (WAN) is 285, indicating an uneven distribution in larger loan balances. In Fitch's view, transactions with a WAN of less than 300 carry the risk that the performance may be negatively affected by a few assets relative to the statistically derived assumptions underlying their ratings. The lower WAN resulted in a 3% penalty to the pool's PD.

Robust Representation Framework: Fitch considers the transaction's representation, warranty and enforcement (RW&E) mechanism framework to be consistent with a Tier 1 quality. The transaction benefits from a life-of-loan representation and warranty (R&W), as well as a backstop by the seller, TH TRS Corp., in case of insolvency or dissolution of the related originator. Similar to recent transactions rated by Fitch, ABMT 2015-4 contains binding arbitration provisions that may serve to provide timely resolution to R&W disputes.

Originators with Limited Performance History: Many of the loans were originated by lenders with a limited non-agency performance history. However, all the loans were originated to meet TH TRS' purchase criteria and were reviewed by a third-party due diligence firm to TH TRS' guidelines with no material findings. TH TRS is a wholly owned subsidiary of Two Harbors Investment Corp. In addition, Fitch conducted an in-depth call with the top four originators, which account for approximately 48% of the pool.

Extraordinary Expense Treatment: The trust provides for expenses, including indemnification amounts and costs of arbitration, to be paid by the net WA coupon (WAC) of the loans, which does not impact the contractual interest due on the certificates. Furthermore, the expenses to be paid from the trust are capped at $300,000 per annum ($125,000 for the trustee), which can be carried over each year, subject to the cap until paid in full.

Safe-Harbor Qualified Mortgages: All the loans in 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 the loans subject to this rule were classified as safe harbor QM (SHQM), for which no adjustment was made.

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 market value declines (MVDs) than 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'.

The defined stress sensitivity analysis focuses 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 7.1% 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 analyses 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 6%, 30% and 50% could potentially lower the 'AAAsf' rated class 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 a compliance, credit, valuation and data integrity review. Fitch considered this information in its analysis and the findings did not have an adverse impact on our analysis.

Fitch received certifications indicating that the loan-level due diligence was conducted in accordance with Fitch's published standards for credit, property valuation and legal/regulatory compliance. The certifications also stated that the company performed its work in accordance with the independence standards, per Fitch's criteria.

Additional information is available at www.fitchratings.com.

Agate Bay Mortgage Trust 2015-4 (US RMBS)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866648

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 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=985674

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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 10004
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
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 10004
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
sandro.scenga@fitchratings.com