NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to rate J.P. Morgan Mortgage Trust 2016-3 (JPMMT 2016-3) as follows:
--$235,513,000 class 1-A-1 exchangeable certificates 'AAAsf'; Outlook
--$235,513,000 class 1-A-2 exchangeable certificates 'AAAsf'; Outlook Stable;
--$176,635,000 class 1-A-3 exchangeable certificates 'AAAsf'; Outlook Stable;
--$176,635,000 class 1-A-4 certificates 'AAAsf'; Outlook Stable;
--$58,878,000 class 1-A-5 exchangeable certificates 'AAAsf'; Outlook Stable;
--$58,878,000 class 1-A-6 exchangeable certificates 'AAAsf'; Outlook Stable;
--$46,443,000 class 1-A-7 exchangeable certificates 'AAAsf'; Outlook Stable;
--$46,443,000 class 1-A-8 certificates 'AAAsf'; Outlook Stable;
--$12,435,000 class 1-A-9 exchangeable certificates 'AAAsf'; Outlook Stable;
--$12,435,000 class 1-A-10 certificates 'AAAsf'; Outlook Stable;
--$235,513,000 class 1-AX-1 notional certificates 'AAAsf'; Outlook Stable;
--$235,513,000 class 1-AX-2 notional exchangeable certificates 'AAAsf'; Outlook Stable;
--$176,635,000 class 1-AX-3 notional certificates 'AAAsf'; Outlook Stable;
--$58,878,000 class 1-AX-4 notional exchangeable certificates 'AAAsf'; Outlook Stable;
--$46,443,000 class 1-AX-5 notional certificates 'AAAsf'; Outlook Stable;
--$12,435,000 class 1-AX-6 notional certificates 'AAAsf'; Outlook Stable;
--$17,092,000 class 1-A-M certificates 'AAAsf'; Outlook Stable;
--$110,417,000 class 2-A-1 exchangeable certificates 'AAAsf'; Outlook Stable;
--$110,417,000 class 2-A-2 certificates 'AAAsf'; Outlook Stable;
--$110,417,000 class 2-AX-1 notional certificates 'AAAsf'; Outlook Stable;
--$110,417,000 class 2-AX-2 notional certificates 'AAAsf'; Outlook Stable;
--$110,417,000 class 2-AX-3 notional exchangeable certificates 'AAAsf'; Outlook Stable;
--$8,013,000 class 2-A-M certificates 'AAAsf'; Outlook Stable;
--$25,105,000 class A-M exchangeable certificates 'AAAsf'; Outlook Stable;
--$9,291,000 class B-1 certificates 'AAsf'; Outlook Stable;
--$6,325,000 class B-2 certificates 'Asf'; Outlook Stable;
--$3,756,000 class B-3 certificates 'BBBsf'; Outlook Stable;
--$1,977,000 class B-4 certificates 'BBsf'; Outlook Stable.
Fitch will not be rating the following certificates:
--$2,965,364 class B-5 certificates;
--$19,769,964 class RR exchangeable certificates.
KEY RATING DRIVERS
High-Quality Mortgage Pool (Positive): The collateral pool consists of high-quality 30-year and 15-year fixed-rate, fully amortizing loans to borrowers with strong credit profiles, low leverage and large liquid reserves. The pool has a weighted average (WA) FICO score of 765 and an original combined loan-to-value (CLTV) ratio of 66.9%. The collateral attributes of the subject pool are largely consistent with recent JPMMT transactions issued in 2015 and 2016.
Geographically Diverse Pool (Positive): The pool's primary concentration risk is in California, where approximately 44% of the collateral is located. Approximately 54% of the pool is located in the top five regions in the subject pool (San Francisco, Los Angeles, New York, Boston, and Washington D.C.). However, these concentrations show significant improvement over many of the JPMMT deals rated by Fitch in 2015, in which over 50% of the pool was concentrated in California and over 80% in the top five regions. As a result, no geographic concentration penalty was applied.
Straightforward Deal Structure (Positive): The mortgage cash flow and loss allocation are based on a senior-subordinate, shifting-interest structure, whereby the subordinate classes receive only scheduled principal and are locked out from receiving unscheduled principal or prepayments for five years. The lockout feature helps maintain subordination for a longer period should losses occur later in the life of the deal. The applicable credit support percentage feature redirects subordinate principal to classes of higher seniority if specified credit enhancement (CE) levels are not maintained.
To mitigate tail risk, which arises as the pool seasons and fewer loans are outstanding, a subordination floor of 1.25% of the original balance will be maintained for the certificates. Additionally, there is no early stepdown test that might allow principal prepayments to subordinate bondholders earlier than the five-year lockout schedule.
Leakage from Reviewer Expenses (Negative): The trust is obligated to reimburse the breach reviewer, Pentalpha Surveillance LLC (Pentalpha), each month for any reasonable out-of-pocket expenses incurred if the company is requested to participate in any arbitration, legal or regulatory actions, proceedings or hearings. These expenses include Pentalpha's legal fees and other expenses incurred outside its annual fee schedule and are not subject to a cap or certificateholder approval.
Furthermore, certificateholders are obligated to pay Pentalpha a termination fee of $140,000 to terminate the contract. While Fitch accounted for the potential additional costs by upwardly adjusting its loss estimation for the pool, it views this construct as adding potentially more ratings volatility than those that do not have this type of provision.
Extraordinary Expense Adjustment (Negative): Extraordinary expenses, which include loan file review costs, arbitration expenses for enforcement of the reps and additional fees of Pentalpha, will be taken out of available funds and not accounted for in the contractual interest owed to the bondholders. This construct can result in principal and interest shortfalls to the bonds, starting from the bottom of the capital structure. To account for the risk of these noncredit events reducing subordination, Fitch adjusted its loss expectations upward by 35 bps at the 'AAAsf' level.
Tier 3 Representation and Warranty Framework (Negative): Fitch believes the value of the rep and warranty framework is diluted by the presence of qualifying and conditional language in conjunction with sunset provisions, which reduces lender breach liability. While Fitch believes the high credit-quality pool and clean diligence results mitigate these risks, it considered the weaker framework in the analysis.
Fitch's analysis incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at the MSA level. 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 may be considered in the surveillance of the transaction. Two sets of sensitivity analyses were conducted at the state and national levels to assess the effect of higher MVDs for the subject pool.
This defined stress sensitivity analysis demonstrates 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 6.5%. The analysis indicates that 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'.
Fitch's stress and rating sensitivity analysis are discussed in its presale report released today 'J.P. Morgan Mortgage Loan Trust 2016-3', available at 'www.fitchratings.com' or by clicking on the link.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by AMC Diligence, LLC (AMC), Clayton Holdings, LLC (Clayton), IngletBlair, LLC (IngletBlair), and Opus Capital Markets Consultants (Opus). The third-party due diligence described in Form 15E focused on a compliance review, credit review and valuation review. The due diligence companies performed a review on 100% of the loans. Fitch considered this information in its analysis and it did not have an effect on Fitch's analysis or conclusions. Fitch believes the overall results of the review generally reflected strong underwriting controls.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under 'Related Research' below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.
Additional information is available at www.fitchratings.com.
Sources of Information:
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 provided on the transaction's 17g5 website available on 'www.structuredfn.com'.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)
U.S. RMBS Cash Flow Analysis Criteria (pub. 15 Apr 2016)
U.S. RMBS Loan Loss Model Criteria (pub. 12 May 2016)
U.S. RMBS Master Rating Criteria (pub. 27 Jun 2016)
U.S. RMBS Seasoned and Re-Performing Loan Criteria (pub. 12 May 2016)
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 17 Jun 2016)
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
ABS Due Diligence Form 15E 2
ABS Due Diligence Form 15E 3
ABS Due Diligence Form 15E 4