NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to rate Bayview Opportunity Master Fund IVb Trust 2016-CRT1 (BOMFT 2016-CRT1) as follows:
--$63,840,000 class M-1 notes 'A-sf'; Outlook Stable;
--$54,265,000 class M-2 notes 'BBB-sf'; Outlook Stable;
--$25,536,000 class B-1 notes 'BBsf'; Outlook Stable;
--$13,965,000 class B-2 notes 'Bsf'; Outlook Stable;
--$63,840,000 class M-1X notional notes 'A-sf'; Outlook Stable;
--$54,265,000 class M-2X notional notes 'BBB-sf'; Outlook Stable
The following class will not be rated by Fitch:
--$1,994,678 class B-3
BOMFT 2016-CRT1 is collateralized by 12 underlying securities from GSE Credit Risk Transfer (CRT) transactions. The underlying securities include M2 classes from various Fannie Mae Connecticut Avenue Securities (CAS) transactions and M3 classes from various Freddie Mac Structured Agency Credit Risk (STACR) transactions.
The underlying securities are general unsecured obligations of Fannie Mae ('AAA'/Outlook Stable) and Freddie Mac ('AAA'/Outlook Stable) and are subject to the credit and principal payment risk of a reference pool of certain residential mortgage loans held in various Fannie Mae or Freddie Mac-guaranteed MBS. All of the underlying securities were issued between 2014 and 2015, and all but one of the underlying transactions rely on a fixed tiered loss severity schedule that is determined by the amount of cumulative credit events in the reference pool when passing credit losses to bondholders.
Fitch currently holds public ratings on eight of the 12 underlying securities ranging from 'B+sf' to 'BB+sf'. For unrated securities that are not in Fitch-rated transactions, Fitch relies on publicly available information in its credit analysis.
The 'A-sf' rating for the M-1 notes, the 'BBB-sf' rating on the M-2 notes, the 'BBsf' rating on the B-1 notes and the 'Bsf' rating for the B-2 notes reflects credit enhancement (CE) sufficient to protect against projected losses on the remaining underlying reference pool balances of approximately 2.00%, 1.20%, 0.80% and 0.45%, respectively, when the projected reference pool losses are weighted by the contributing balance of the underlying securities. To help ensure rating stability on the new notes, the initial CE provides protection one rating notch above Fitch's rating-stressed projected losses. For example, the M-1 notes ('A-sf') are initially protected against Fitch's 'Asf' rating stress scenario and the M-2 notes ('BBB-sf') are initially protected against Fitch's 'BBBsf' rating stress scenario.
The CE and projected recovery for the rated notes in this transaction were assessed by comparing the CE and class size for each underlying security to Fitch's loss projections for the related reference mortgage pools. For example, a hypothetical underlying security with CE of 2.00% and a class size of 1.00% is assumed to recover 50% of its class principal balance in a rating stress scenario with a 2.50% underlying reference pool loss. The total estimated principal recovery amount available to pay the rated notes is the aggregated projected recovery of each underlying security, weighted by its contributing balance. Fitch believes this is a conservative approach to estimating principal recovery for the new rated classes, since it does not allow for any rating benefit from the shorter remaining life of the M-1 and M-2 classes. To the extent the new rated classes pay off in full before Fitch's projected losses on the underlying reference pools are fully realized, the classes will be able to sustain more severe stress scenarios than their initial rating reflects.
Fitch's credit rating reflects the probability of ultimate recovery of principal and the timely payment of bond interest up to the Net WAC cap. Fitch's credit analysis of BOMFT 2016-CRT1 focused primarily on principal recovery due to the transaction's definition of the Net WAC cap. The Net WAC cap is defined as the interest collected (not due) on the underlying securities, net of expenses. In such a structure, interest shortfalls that can affect credit ratings on the new classes are generally not possible, since interest due is effectively defined as interest available.
However, the structure allows for the repayment of Net WAC cap shortfalls to the M-1, M-2 and B-1 classes prior to paying interest due to the B-2 class. Consequently, interest shortfalls that can affect credit ratings are possible for the B-2 class. Fitch analysed scenarios that could result in interest shortfalls for the B-2 class, focusing on the potential for large extraordinary expenses after the coupon step-up date that could result in interest collections being diverted to pay Net WAC cap shortfalls to more senior classes than the B-2 class. Fitch believes the risk of interest shortfalls to the B-2 class is consistent with a 'Bsf' credit rating due to mitigating factors such as the annual limit on eligible extraordinary expenses and the margin between the coupon on the underlying securities and the new rated classes.
KEY RATING DRIVERS
Performance to Date (Positive): All of the underlying reference pools have performed well, incurring fewer than 5 bps of loss to date. The performance has been driven by high credit quality and strong home price appreciation. The remaining loans have benefitted from an average of 20% home price appreciation since origination.
Fixed Tiered Loss Severity Transactions (Positive): Eleven of the 12 underlying securities are from CRT transactions structured with a fixed loss severity schedule that is based upon the percentage of cumulative credit events. This structure limits potential losses to bondholders. Further, as the transactions age with strong performance, the potential for high loss severities becomes increasingly less probable, even in high-stress rating scenarios.
Hard Maturity Date (Positive): All of the underlying transactions are structured to a final legal maturity at which time the issuer will repay the outstanding balance of the transaction in full. The issuers are currently rated 'AAA' by Fitch and therefore Fitch considers the probability of repayment of any outstanding balances at the maturity date to be a 'AAA' credit risk. The final maturity date for each transaction is either 10 years or 12.5 years after issuance depending on whether it is a fixed loss severity transaction or an actual loss transaction. As the transactions continue to season and approach the maturity date, the window in which losses can be realized by the transaction decreases, resulting in lower loss expectations on the remaining balances. Fitch applies a reduction to its lifetime default expectations to account for this, with the most seasoned transactions receiving the largest benefit.
Sequential Payment Priority (Positive): Due to the sequential payment priority among the non-senior classes in the underlying transactions, the underlying securities have benefitted from an increase in CE as a percentage of the underlying reference pool.
Not Currently Receiving Principal (Negative): All but one of the underlying securities are not currently receiving principal. However, Fitch estimates, on average, the underlying securities are likely to begin receiving principal within two years.
Class Thickness (Negative): The classes of the underlying securities make up a relatively small percentage of the underlying reference pool balance, with an average size between 2% and 3%. The small class sizes relative to the CRTs' capital structure may increase the potential volatility of recoveries in the event of a default. When considering the class thickness and recovery volatility of the underlying securities, Fitch considered the size of the class relative to the differences between projected reference pool losses in increasingly stressful rating scenarios. On average for the underlying securities, the difference between the scenario that causes a dollar of principal writedown and a scenario that results in a complete loss to the underlying security is approximately two full rating categories. Measured a different way in terms of national home price decline, Fitch estimates the difference between the scenarios that cause a dollar of loss and a complete loss on the underlying securities is, on average, a 10% further national home price decline, which Fitch believes is a meaningful difference in macroeconomic scenarios. Additionally, unlike recent vintage private label U.S. RMBS where a relatively small number of loans can make up 2%-3% of a mortgage pool, the same percentage represents thousands of loans in CRT transactions, helping to mitigate idiosyncratic risk.
Receivership Risk Considered (Neutral): Under the Federal Housing Finance Regulatory Reform Act, the Federal Housing Finance Agency (FHFA) must place Fannie Mae and Freddie Mac into receivership if it determines that the government-sponsored enterprise's (GSE) assets are less than its obligations for longer than 60 days following the deadline of its SEC filing. As receiver, FHFA could repudiate any contract entered into by Fannie Mae or Freddie Mac if it is determined that such action would promote an orderly administration of the GSE's affairs. Fitch believes that the U.S. government will continue to support both Fannie Mae and Freddie Mac, as reflected in its current rating of the GSE. However, if at some point Fitch views the support as being reduced and receivership likely, the rating of the GSEs could be downgraded, and ratings on the notes for the underlying securities - and ultimately this transaction -- could be affected.
Although the transaction is not a Re-REMIC, since the underlying securities are not REMIC classes, Fitch's 'U.S. RMBS Surveillance and Re-REMIC Criteria' was considered due to the similarities in transaction structure with Re-REMICs.
Fitch made two variations to the criteria for this transaction. The first variation applies to which bonds are eligible for ratings in new issue Re-REMICs. While Fitch generally limits underlying bond eligibility to senior bonds that are currently receiving principal payments, Fitch believes there are sufficient mitigating factors to provide ratings on these classes. Such factors include the sequential pay structure and a hard maturity date (in 100 months on average), which is expected to mitigate tail risk common in U.S. RMBS. Additionally, performance to date on the reference pools has been strong, with many rated classes indicating positive rating pressure. Finally, the issuers of the underlying assets (Fannie Mae and Freddie Mac) hold unique leverage in the residential mortgage market, which is expected to help mitigate loan quality weakness and operational risk.
The second variation from the above referenced criteria is in relation to the application of Fitch's Portfolio Credit Model (PCM). The criteria state that Fitch will utilize a hybrid approach between Fitch's RMBS and Structured Credit groups for transactions backed by more than five non-distressed RMBS. While Fitch ensured the projected default probability of the underlying securities was consistent with the PCM approach, Fitch relied on bond-level analysis (rather than portfolio probabilities) to estimate the recoveries of the underlying securities in the event of a default.
Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.
Classes currently rated below 'Bsf' are at-risk to default at some point in the future. As default becomes more imminent, bonds currently rated 'CCCsf' and 'CCsf' will migrate towards 'Csf' and eventually 'Dsf'.
The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
No third-party due diligence was provided or reviewed in relation to this rating action.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
Representations, Warranties and Enforcement Mechanisms are not taken into consideration for U.S. RMBS Resecuritizations. Any Reps and Warranties included in the underlying transaction will be a benefit for the rated classes.
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 08 Mar 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 Surveillance and Re-REMIC Criteria (pub. 17 Jun 2016)
Dodd-Frank Rating Information Disclosure Form
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