NEW YORK--(BUSINESS WIRE)--Fitch Ratings rates Bayview Opportunity Master Fund IVa Trust 2016-SPL1 (BOMFT 2016-SPL1) as follows:
--$150,945,000 class A notes 'AAAsf'; Outlook Stable;
--$150,945,000 class A-IOA notional notes 'AAAsf'; Outlook Stable;
--$150,945,000 class A-IOB notional notes 'AAAsf'; Outlook Stable;
--$24,435,000 class B1 notes 'AAsf'; Outlook Stable;
--$24,435,000 class B1-IOA notional notes 'AAsf'; Outlook Stable;
--$24,435,000 class B1-IOB notional notes 'AAsf'; Outlook Stable;
--$10,352,000 class B2 notes 'Asf'; Outlook Stable;
--$10,352,000 class B2-IO notional notes 'Asf'; Outlook Stable;
--$11,556,000 class B3 notes 'BBBsf'; Outlook Stable;
--$11,556,000 class B3-IOA notional notes 'BBBsf'; Outlook Stable;
--$11,556,000 class B3-IOB notional notes 'BBBsf'; Outlook Stable;
--$5,657,000 class B4 notes 'BBsf'; Outlook Stable;
--$5,657,000 class B4-IOA notional notes 'BBsf'; Outlook Stable;
--$5,657,000 class B4-IOB notional notes 'BBsf'; Outlook Stable;
--$4,333,000 class B5 notes 'BBsf'; Outlook Stable;
--$4,333,000 class B5-IOA notional notes 'BBsf'; Outlook Stable;
--$4,333,000 class B5-IOB notional notes 'BBsf'; Outlook Stable;
--$8,667,000 class B6 notes 'Bsf'; Outlook Stable.
The following classes will not be rated by Fitch:
--$24,797,124.60 class B7 notes;
--$24,797,124.60 notional class B7-IO notes.
The notes are supported by a pool of 4,842 seasoned performing and re-performing (RPL) loans of which 97.6% are daily simple interest mortgage loans totaling $240.74 million, which excludes $5.6 million in non-interest-bearing deferred principal amounts, as of the cutoff date. Distributions of principal and interest and loss allocations are based on a sequential pay, senior subordinate structure.
The 'AAAsf' rating on the class A, A-IOA and A-IOB notes reflects the 37.30% subordination provided by the 10.15% class B1, 4.30% class B2, 4.80% class B3, 2.35% class B4, 1.80% class B5, 3.60% class B6, and 10.30% class B7 notes.
Fitch's ratings on the class notes reflect the credit attributes of the underlying collateral, the quality of the servicer (Bayview Loan Servicing, LLC, rated 'RSS2+'), the representation (rep) and warranty framework, minimal due diligence findings, and the sequential pay structure.
KEY RATING DRIVERS
Clean Current Loans (Positive): The loans are seasoned approximately 10 years with roughly 97% of the pool paying on time for the past 24 months and 92% current for the past three years. In addition, only 27.9% of the pool has been modified due to performance issues, while the remaining loans were either not modified (39.5%) or had their interest rates reduced due to an interest rate reduction rider incorporated at origination (32.6%).
Low Property Values (Concern): The average property value of the pool is approximately $92,000, which is much lower than the average of other Fitch rated RPL transactions of over $150,000. Historical data from CoreLogic Loan Performance indicate that recently observed loss severities (LS) have been higher for very low property values than that implied by Fitch's loan loss model. For this reason, Fitch applied LS floors to loans with property values below $100,000, which ranged from 49% to 100% and increased Fitch's 'AAAsf' loss expectation by 220 basis points (bps).
Daily Simple Interest Loans (Concern): Approximately 97% of the pool consists of daily simple interest loans that accrue interest on a daily basis from the date of the borrower's last payment. While the monthly payment is fixed, if a borrower pays earlier than the due date, less of the payment is applied to interest and more is applied to principal. If the borrower pays late, more of the payment is applied to interest and less goes to principal.
Because the bonds pay on a 30/360 day schedule, Fitch analyzed the risk of a disproportionate number of borrowers paying earlier than scheduled, which could cause the bonds to become undercollateralized solely due to the mismatch in application of payments between the loans and the bonds. Fitch analyzed pay dates of the borrowers and found that roughly the same number of borrowers pay either early or later than the due date. In addition, close to 60% of the borrowers are on autopay, which mitigates the payment date risk. Furthermore, Fitch believes the excess interest generated by the later pay borrowers that is available to pay down principal should offset the risk of undercollateralization.
Portfolio Loans from a Single Originator (Positive): This transaction consists of a portfolio of loans that Bayview Asset Management (BAM) purchased from CitiFinancial Credit Company and its lending subsidiaries (CitiFinancial). Given that over 95% of the loans were originated and serviced by a single originator prior to sale to BAM, Fitch believes that a 30% compliance and 20% due diligence and pay history sample is sufficient to capture the potential risk of incomplete files that could accompany portfolios traded in the secondary market. A full custodial file was conducted on 100% of the pool a tax review on 93% of the pool and title search on over 96% of the pool. In addition, BAM, with the guidance of Bayview Loan Servicing, LLC (BLS, 'RSS2+') as servicer, reconstructed the past four years of pay histories for 100% of the loans.
No Servicer P&I Advances (Mixed): The servicer will not be advancing delinquent monthly payments of P&I, which reduces liquidity to the trust. However, as P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust, the loan-level LS are less for this transaction than for those where the servicer is 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 (Positive): 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. In addition, 40 bps from the interest remittance amount will be used to pay down principal as well as any excess interest allocation from loan level daily interest accrual calculation. The provision to re-allocate principal to pay interest on the 'AAAsf' and 'AAsf' rated notes prior to other principal distributions as well as the application of excess interest to the notes is highly supportive of timely interest payments to those classes, in the absence of servicer advancing.
Potential Interest Deferrals (Mixed): 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,' dated June 16, 2016, 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 well in advance of the legal final maturity under the relevant rating stress.
Tier 1 Representation Framework (Positive): Fitch considers the transaction's representation, warranty and enforcement (RW&E) mechanism framework to be consistent with Tier I quality. The transaction benefits from life-of-loan R&W, as well as a backstop by BAM in the event that the sponsor, Bayview Opportunity Master Fund IVa, L.P., is liquidated or terminated.
Solid Alignment of Interest (Positive): The sponsor, Bayview Opportunity Master Fund IVa, L.P., will acquire and retain a 5% vertical interest in each class of the securities to be issued. In addition, the sponsor will also be the rep provider until at least January 2024. If the fund is liquidated or terminated, BAM will be obligated to provide remedy for material breaches of representations and warranties.
Fitch's analysis incorporated five criteria variations from the 'U.S. RMBS Master Rating Criteria' and the 'U.S. RMBS Seasoned and Re-performing Loan Criteria', which are described below.
The first variation is the less than 100% TPR due diligence review for regulatory compliance, data integrity and pay history. Title review was conducted on over 96% of the pool, a tax review on 93% of the pool and custodial file review on 100% of the pool. The less than 100% TPR review is consistent with Fitch's criteria for seasoned performing pools. However, because Fitch's criteria states it views pools as seasoned performing if it consists of loans that have never been modified, a criteria variation was made. Without this variation, the pool would have had 100% compliance, data integrity and pay history TPR review to achieve a 'AAAsf' rating. Fitch is comfortable with the reduced due diligence sample since over 95% of the loans were originated by a single lender and the sample provided is sufficient to provide a reliable indication of the operational quality of the lender.
The second variation is the use of Clear Capital's HDI valuation product as updated property values instead of an automated valuation model (AVM). Fitch's criteria allow for the use of an AVM product as updated values if there are sufficient compensating factors. Clear Capital's HDI product is not an AVM but rather an indexation product. Clear Capital is a reputable third party vendor that provides valuation services.
A review of the HDI product's white paper indicates values are based on a robust data set which goes down to the neighborhood level and incorporates REO sales. Fitch believes the HDI product to be an adequate alternative to an AVM. The HDI product was only used for loans that were clean current for the prior 24 months and had a LTV <60% based on the more conservative of the HDI value and Fitch's indexed value. The impact of using this product is neutral as the HDI product is a sufficient alternative to an AVM product and was only used on loans with a LTV of less than 60%.
The third variation is that there was no review conducted for evidence that an active hazard insurance policy is in place. The impact of this variation is neutral as Fitch expects the servicer to maintain hazard insurance on all of the properties. Fitch confirmed that the TPR firms are only able to check for active hazard insurance through a servicing comment review. Given that no loans were delinquent in the past 12 months, a servicing comment review was not performed.
The fourth variation is non-application of a default penalty to income documentation for loans with less than full income documentation that are over five years seasoned and had not missed a payment in the prior three years. Fitch conducted analysis comparing the performance between loans that were full documentation and non-full documentation at origination. The analysis showed that after five years of seasoning, the performance was the same. The impact on the loss expectations from application of this variation resulted in lower loss expectations of roughly two to four points depending on the rating category.
Lastly, Fitch's criteria provides for updated property values to be no more than 12 months old at the time of securitization. As a result of the transaction's deal closing timeline, 382 broker's price opinions (BPOs) or appraisals that Fitch used are now 13 months old, which is a variation to criteria. Given that these BPOs or appraisals have only aged one month, the rating impact is neutral on loss expectations.
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 36.1% at 'AAAsf'. 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'.
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), WestCor Land Title Insurance Company (WestCor), Linear Title & Closing Ltd. (Linear), Lincoln Abstract & Settlement Services, LLC (Lincoln), DRI Title and Escrow (DRI) and Digital Risk, LLC (Digital Risk). The third-party due diligence described in Form 15E focused on: regulatory compliance review, 24-month-pay history review, data integrity review, and BPO reconciliation on the loans. A servicing comment review was not performed as all loans have been current in the past 12 months. In addition, Westcor, Linear, Lincoln, and DRI 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 sample due diligence review for regulatory compliance (approximately 30%), data integrity (approximately 30%) and pay histories (approximately 20%) was conducted while a tax and custodial file review was conducted on 100%. The tax review result was not received on approximately 7% of the pool. Digital Risk, LLC conducted a broker price opinion (BPO) reconciliation on approximately 22% of the BPOs obtained. The title review was completed on almost 97% of the pool and the remaining loans will be checked post deal closing to confirm clear title for the remaining 3% of the pool. Any title issues will be cleared within 90 days of closing, otherwise the loan will be repurchased. There were minimal findings by the TPRs.
Fitch considered this information in its analysis and based on the findings made minor adjustments to its analysis.
Fitch made an adjustment on 93 loans that were subject to federal, state, and/or local predatory testing. These loans contained material violations including an inability to test for high cost violations or confirm compliance, which could expose the trust to potential assignee liability. These loans were marked as 'indeterminate'. Typically, the HUD issues are related to missing the Final HUD, illegible HUDs, incomplete HUDs due to missing pages or only having estimated HUDs where the final HUD1 was not used to test for high-cost loans. To mitigate this risk, Fitch assumed a 100% LS for loans in the states that fall under Freddie Mac's 'do not purchase' list of high cost or 'high risk.' 13 loans were affected by this approach.
For the remaining 80 loans subject to high-cost testing, the properties are not located in the states that fall under Freddie Mac's 'do not purchase' list, and, therefore, the likelihood of all loans being high cost is lower. However, Fitch assumes the trust could potentially incur additional legal expenses. Fitch increased its LS expectations by 5% for these loans to account for the risk.
For the remaining 13 'C' and 'D' graded loans, the findings indicated a potential for foreclosure delays; however, Fitch extends its timelines by six months for RPL RMBS, which the agency believes should adequately protect against any challenges for some of these findings. Eight of these 13 loans have a late charge fee that exceeds the state allowable charge. Typically, when a loan is sent to the servicer, the servicer would correct the late charge fee to meet the maximum per state. The exception can be used as a defense of foreclosure and cause a delay in the foreclosure process. Three loans are eligible for federal and/or state high cost testing; however, the files did not have 'final' material documents in file, such as final HUD settlement statement or TIL due to the documents are not signed or stamped but are still determined to be final based on attributes listed on the HUD.
The loans are now outside the applicable SOL as per federal or state limits. However, these are material missing documents and could be used as a defense of foreclosure and cause a delay in the foreclosure process. Finally, two of the loans have a state loan-specific documentation, which does not impair the validity of a loan or expose a true secondary market purchaser of a loan to assignee liability.
There were 503 loans (13 loans which had Indeterminate HUD1 Adjustment applied) missing modification documents or a 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.
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.17g5.com'.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01
Criteria for Interest Rate Stresses in Structured Finance Transactions
and Covered Bonds (pub. 26 Oct 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. 29 Nov 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. 15 Nov 2016)
Bayview Opportunity Master Fund IVa Trust 2016-SPL1 -- Appendix
Dodd-Frank Rating Information Disclosure Form
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