Fitch Rates Towd Point Mortgage Trust 2016-1

NEW YORK--()--Fitch Ratings assigns the following ratings to Towd Point Mortgage Trust 2016-1 (TPMT 2016-1):

--$523,151,000 class A1 notes 'AAAsf'; Outlook Stable;

--$51,387,000 class A2 notes 'AAsf'; Outlook Stable;

--$37,092,000 class M1 notes 'Asf'; Outlook Stable;

--$32,069,000 class M2 notes 'BBBsf'; Outlook Stable;

--$29,364,000 class B1 notes 'BBsf'; Outlook Stable;

--$20,864,000 class B2 notes 'Bsf'; Outlook Stable;

--$523,151,000 class A1A exchangeable notes 'AAAsf'; Outlook Stable;

--$523,151,000 class A1B exchangeable notes 'AAAsf'; Outlook Stable;

--$523,151,000 class A1C exchangeable notes 'AAAsf'; Outlook Stable;

--$523,151,000 class X1 notional exchangeable notes 'AAAsf'; Outlook Stable;

--$523,151,000 class X2 notional exchangeable notes 'AAAsf'; Outlook Stable;

--$523,151,000 class X3 notional exchangeable notes 'AAAsf'; Outlook Stable;

--$574,538,000 class A3 exchangeable notes 'AAsf'; Outlook Stable;

--$574,538,000 class A3A exchangeable notes 'AAsf'; Outlook Stable;

--$574,538,000 class A3B exchangeable notes 'AAsf'; Outlook Stable;

--$574,538,000 class A3C exchangeable notes 'AAsf'; Outlook Stable;

--$574,538,000 class X4 notional exchangeable notes 'AAsf'; Outlook Stable;

--$574,538,000 class X5 notional exchangeable notes 'AAsf'; Outlook Stable;

--$574,538,000 class X6 notional exchangeable notes 'AAsf'; Outlook Stable;

--$611,630,000 class A4 exchangeable notes 'Asf'; Outlook Stable;

--$611,630,000 class A4A exchangeable notes 'Asf'; Outlook Stable;

--$611,630,000 class A4B exchangeable notes 'Asf'; Outlook Stable;

--$611,630,000 class A4C exchangeable notes 'Asf'; Outlook Stable;

--$611,630,000 class X7 notional exchangeable notes 'Asf'; Outlook Stable;

--$611,630,000 class X8 notional exchangeable notes 'Asf'; Outlook Stable;

--$611,630,000 class X9 notional exchangeable notes 'Asf'; Outlook Stable;

--$643,699,000 class A5 exchangeable notes 'BBBsf'; Outlook Stable.

The following classes will not be rated by Fitch:

--$39,410,000 class B3 notes;

--$39,413,325 class B4 notes.

The notes are supported by one collateral group that consisted of 2,868 seasoned performing and re-performing mortgages with a total balance of approximately $772.75 million (which includes $7.95 million, or 1.03 %, of the aggregate pool balance in non-interest-bearing deferred principal amounts) as of the cut-off date.

The 'AAAsf' rating on class A1 notes reflects the 32.30% subordination provided by the 6.65% class A2, 4.80% class M1, 4.15% class M2, 3.80% class B1, 2.70% class B2, 5.10% class B3 and 5.10% class B4 notes.

Fitch's ratings on the class notes reflect the credit attributes of the underlying collateral, the quality of the servicers, Select Portfolio Servicing, Inc. (rated 'RPS1-') and the representation (rep) and warranty framework, minimal due diligence findings and the sequential pay structure.

KEY RATING DRIVERS

Distressed Performance History (Concern): The collateral pool consists primarily of peak-vintage seasoned re-performing loans (RPLs), including loans that have been paying for the past 24 months, which Fitch identifies as 'clean current' (82.6%) and loans that are current but have recent delinquencies or incomplete paystrings are identified as 'dirty current' (17.4%). All loans were current as of the cutoff date. 62.1% of the loans have received modifications.

'D' Grades for Compliance (Concern): The third-party review (TPR) firm's due diligence review resulted in 76 loans graded 'D', the majority of which had late fee charges that violated state regulation or had HUD1 Settlement Statement (HUD1) exceptions. For 30 loans (1.05%), the due diligence results showed issues regarding high cost testing with the loans either missing the final HUD1 or having used alternate documentation to test. Therefore a slight upwards revision to the model output loss severity (LS) was applied, as further described in the Third-Party Due Diligence section beginning on page 7.

No Servicer P&I Advances (Positive): The servicers will not be advancing delinquent monthly payments of principal and interest (P&I). As P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust, the loan-level loss severities (LS) are less for this transaction than for those where the servicers are obligated to advance P&I. Structural provisions and cash flow priorities, together with increased subordination, provide for timely payments of interest to the 'AAAsf' and 'AAsf' rated classes.

Sequential-Pay Structure (Mixed): The transaction's cash flow is based on a sequential-pay structure whereby the subordinate classes do not receive principal until the senior classes are repaid in full. Losses are allocated in reverse-sequential order. Furthermore, the provision to re-allocate principal to pay interest on the 'AAAsf' and 'AAsf' rated notes prior to other principal distributions is highly supportive of timely interest payments to those classes, in the absence of servicer advancing.

Potential Interest Deferrals (Neutral): To address the lack of an external P&I advance mechanism, principal otherwise distributable to the notes may be used to pay monthly interest. While this helps provide stability in the cash flows to the high investment grade rated bonds the lower rated bonds may experience long periods of interest deferral that will generally not be repaid until such note becomes the most senior outstanding.

Under Fitch's 'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions,' published in May 2014, the agency may assign ratings of up to 'Asf' on notes that incur deferrals if such deferrals are permitted under terms of the transaction documents, provided such amounts are fully recovered with interest accrued thereon prior to legal final maturity under the relevant rating stress.

Limited Life of Rep Provider (Concern): FirstKey Mortgage, LLC as rep provider, will only be obligated to repurchase a loan due to breaches prior to the payment date in April 2017. Thereafter, a reserve fund will be available to cover amounts due to noteholders for loans identified as having rep breaches. Amounts on deposit in the reserve fund, as well as the increased level of subordination, will be available to cover additional defaults and losses resulting from rep weaknesses or breaches occurring after April 2017. If FirstKey Mortgage, LLC does not fulfill its obligation to repurchase a mortgage loan due to a breach, Cerberus Global Residential Mortgage Opportunity Fund, L.P. (the responsible party) will step in to repurchase the loan.

Tier 2 Representation Framework (Neutral): Fitch considers the representation, warranty and enforcement (RW&E) mechanism construct for this transaction to be consistent with what it views as a Tier 2 framework due to the inclusion of knowledge qualifiers and the exclusion of loans from certain reps as a result of third-party due diligence findings. Thus, Fitch increased its 'AAAsf' loss expectations by roughly 200 bps to account for a potential increase in defaults and losses arising from weaknesses in the reps.

Timing of Recordation and Document Remediation (Neutral): An updated title and tax search, as well as a review to confirm that the mortgage and subsequent assignments were recorded in the relevant local jurisdiction, was also performed. Per the representations provided in the transaction, all loans have either been recorded in the appropriate jurisdiction, are in the process of being recorded, or will be sent for recordation with 12 months of the closing date.

While the expected timelines for recordation and remediation are viewed by Fitch as reasonable, Fitch believes that FirstKey's oversight for completion of these activities serves as a strong mitigant to potential delays. In addition, the obligation of FirstKey Mortgage, LLC or Cerberus Global Residential Mortgage Opportunity Fund, L.P. to repurchase loans, for which assignments are not recorded and endorsements are not completed by the payment date in April 2017, aligns the issuer's interests regarding completing the recordation process with those of noteholders.

PD Adjustment for Clean Current Loans (Positive): Fitch's analysis of the performance of clean current loans found that, for these loans, its loan loss model projected probability of default (PD) that was more punitive than that indicated by Fitch's delinquency roll rate projections. To account for this difference, Fitch reduced the lifetime default expectations by approximately 18% for the loans that have a clean payment history for at least the past 24 months.

Deferred Amounts (Negative): Non-interest-bearing principal forbearance amounts totaling $7.95 million (1.03% of the unpaid principal balance) are outstanding on 363 loans. Fitch included the deferred amounts when calculating the borrower's LTV and sLTV, despite the lower payment and amounts not being owed during the term of the loan. The inclusion resulted in higher PDs and LS than if there were no deferrals. Fitch believes borrower default behaviour for these loans will resemble that of the higher LTVs as exit strategies (i.e. sale or refinancing) will be limited relative to those borrowers with more equity in the property.

Third-Party Loan Sale Provisions (Neutral): The transaction permits nonperforming loans and loans classified as real estate-owned (REO) to be sold to unaffiliated third parties to maximize liquidation proceeds to the issuer. FirstKey as asset manager is charged with responsibility for arranging such sales. To ensure that loan sales do not result in losses to the trust that exceed Fitch's expectations, the sale price is floored at a minimum value equal to 63.42% of the unpaid principal balance, which approximates Fitch's 'Bsf' LS expectations.

Solid Alignment of Interest (Positive): FirstKey Mortgage, LLC in its capacity as the Sponsor for the securitization will acquire and retain a 5% vertical interest in each class of the securities to be issued.

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.

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 model-projected 5%. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.

Fitch also conducted sensitivities to determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'.

DUE DILIGENCE USAGE

Fitch was provided with due diligence information, as well as the final Form 15E, from WestCor, Clayton, American Mortgage Consultants (AMC)/JCIII & Associates (JCIII). The due diligence focused on regulatory compliance, pay history, servicing comments, the presence of key documents in the loan file and data integrity. In addition, Westcor, AMC, and JCIII were retained to perform an updated title and tax search, as well as a review to confirm that the mortgages were recorded in the relevant local jurisdiction and the related assignment chains.

A regulatory compliance and data integrity review was competed on 100% of the pool. A pay history review was conducted on 98% of the pool, and a servicing comment review was completed on approximately 31% of the loans.

Fitch considered this information in its analysis and based on the findings, Fitch made minor adjustments to its analysis.

Two loans had their loss severity adjusted by 5%, since the statute of limitations (SOL) had not expired based on the reports provided by the TPR firms.

248 loans experienced a 1X30 delinquency in the last 12 months and a servicing comment review was either not performed or performed prior to October 2015; a 100% PD was assumed.

42 loans were found to have an exception due to missing modification documents or a missing signature on modification documents. For these loans, timelines were extended by an additional three months in addition to the six-month timeline extension applied to the entire pool.

Two of the loans that were graded 'D' and eligible for federal, state, and/or local predatory testing could expose the trust to potential assignee liability as they contained material violations including an inability to test for high cost violations or confirm compliance. These loans are marked as 'indeterminate' and are located in states that fall under Freddie Mac's do not purchase list of 'high cost' or 'high risk'. For these two loans Fitch assumed a 100% loss severity.

The likelihood of all loans being high cost is lower for the remaining 28 loans graded 'D' and eligible for federal, state, and/or local predatory testing where a final HUD1 was not used for testing and the properties are not located in the states that fall under Freddie Mac's do not purchase list. However, Fitch assumes the trust could potentially incur notable legal expenses and increased its loss severity expectations by 5% for these loans to account for the risk.

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

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Exposure Draft: U.S. RMBS Loan Loss Model Criteria (pub. 08 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874961

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

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. 03 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868923

U.S. RMBS Master Rating Criteria (pub. 21 Jan 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876378

U.S. RMBS Qualified and Non-Qualified Mortgage Criteria (pub. 31 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863837

U.S. RMBS Seasoned and Re-Performing Loan Criteria (pub. 18 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875109

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 01 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866259

Related Research

Towd Point Mortgage Trust 2016-1 -- Appendix

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879021

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001719

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1001719&flm_nm=15e_1001719_1.pdf

ABS Due Diligence Form 15E 2

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1001719&flm_nm=15e_1001719_2.pdf

ABS Due Diligence Form 15E 3

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1001719&flm_nm=15e_1001719_3.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001719

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Susan Hosterman
Director
+1-212-908-0670
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rachel Noonan
Director
+1-212-908-0224
or
Committee Chairperson
Roelof Slump
Managing Director
+1-212-908-0705
or
Media Relations:
Elaine Bailey, +44 203 530 1153, London
elaine.bailey@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Susan Hosterman
Director
+1-212-908-0670
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Rachel Noonan
Director
+1-212-908-0224
or
Committee Chairperson
Roelof Slump
Managing Director
+1-212-908-0705
or
Media Relations:
Elaine Bailey, +44 203 530 1153, London
elaine.bailey@fitchratings.com