Fitch Rates J.P. Morgan Mortgage Trust 2016-4; Outlook Stable

NEW YORK--()----30 November 2016: Fitch Ratings has assigned ratings to J.P. Morgan Mortgage Trust 2016-4 (JPMMT 2016-4) as follows:

--$300,112,000 class A-1 exchangeable certificates 'AA+sf'; Outlook Stable;

--$300,112,000 class A-2 exchangeable certificates 'AA+sf'; Outlook Stable;

--$273,561,000 class A-3 exchangeable certificates 'AAAsf'; Outlook Stable;

--$273,561,000 class A-4 exchangeable certificates 'AAAsf'; Outlook Stable;

--$205,171,000 class A-5 exchangeable certificates 'AAAsf'; Outlook Stable;

--$205,171,000 class A-6 certificates 'AAAsf'; Outlook Stable;

--$68,390,000 class A-7 exchangeable certificates 'AAAsf'; Outlook Stable;

--$68,390,000 class A-8 exchangeable certificates 'AAAsf'; Outlook Stable;

--$55,110,000 class A-9 exchangeable certificates 'AAAsf'; Outlook Stable;

--$55,110,000 class A-10 certificates 'AAAsf'; Outlook Stable;

--$13,280,000 class A-11 exchangeable certificates 'AAAsf'; Outlook Stable;

--$13,280,000 class A-12 certificates 'AAAsf'; Outlook Stable;

--$26,551,000 class A-13 exchangeable certificates 'AA+sf'; Outlook Stable;

--$26,551,000 class A-14 certificates 'AA+sf'; Outlook Stable;

--$300,112,000 class A-X-1 notional certificates 'AA+sf'; Outlook Stable;

--$300,112,000 class A-X-2 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$273,561,000 class A-X-3 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$205,171,000 class A-X-4 notional certificates 'AAAsf'; Outlook Stable;

--$68,390,000 class A-X-5 notional exchangeable certificates 'AAAsf'; Outlook Stable;

--$55,110,000 class A-X-6 notional certificates 'AAAsf'; Outlook Stable;

--$13,280,000 class A-X-7 notional certificates 'AAAsf'; Outlook Stable;

--$26,551,000 class A-X-8 notional certificates 'AA+sf'; Outlook Stable;

--$4,506,000 class B-1 certificates 'AAsf'; Outlook Stable;

--$6,758,000 class B-2 certificates 'Asf'; Outlook Stable;

--$4,667,000 class B-3 certificates 'BBBsf'; Outlook Stable;

--$2,414,000 class B-4 certificates 'BBsf'; Outlook Stable.

Fitch will not be rating the following certificates:

--$3,379,570 class B-5 certificates;

--$16,092,470 class RR exchangeable certificates.

KEY RATING DRIVERS

High-Quality Mortgage Pool (Positive): The collateral pool consists of high-quality 30-year, fully amortizing loans to borrowers with strong credit profiles, low leverage, and adequate liquid reserves. The pool has a weighted average (WA) FICO score of 752 and an original combined loan-to-value (CLTV) ratio of 72.2%. 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 36.8% of the collateral is located. Approximately 46.5% of the pool is located in the top five regions in the subject pool (Los Angeles, New York, San Francisco, Miami, and Seattle). 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 2.00% 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 from year two to five, $80,000 from year five to eight and $25,000 after year eight, to terminate the contract. While Fitch accounted for the potential additional costs by upwardly adjusting its loss estimation for the pool, Fitch 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 50 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 its analysis.

RATING SENSITIVITIES

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. Three 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 market value declines at the national level. The analysis assumes market value declines of 10%, 20% and 30%, in addition to the model-projected 4.8%. As shown in the table to the right, 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 2016-4', 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), Opus Capital Markets Consultants (Opus), and IngletBlair, LLC (IngletBlair). 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'.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)

https://www.fitchratings.com/site/re/888492

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)

https://www.fitchratings.com/site/re/864368

U.S. RMBS Cash Flow Analysis Criteria (pub. 15 Apr 2016)

https://www.fitchratings.com/site/re/880006

U.S. RMBS Loan Loss Model Criteria (pub. 29 Nov 2016)

https://www.fitchratings.com/site/re/889746

U.S. RMBS Master Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/882350

U.S. RMBS Seasoned and Re-Performing Loan Criteria (pub. 12 May 2016)

https://www.fitchratings.com/site/re/880720

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 15 Nov 2016)

https://www.fitchratings.com/site/re/888698

Related Research

J.P. Morgan Mortgage Trust 2016-4 -- Appendix

https://www.fitchratings.com/site/re/890714

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015585

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1015585&flm_nm=15e_1015585_1.pdf

ABS Due Diligence Form 15E 2

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1015585&flm_nm=15e_1015585_2.pdf

ABS Due Diligence Form 15E 3

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1015585&flm_nm=15e_1015585_3.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015585

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Christine Yan, +1-212-908-0838
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Harrison Okin, +1-212-908-9168
Analyst
or
Committee Chairperson
Grant Bailey, +1-212-908-0544
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christine Yan, +1-212-908-0838
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Harrison Okin, +1-212-908-9168
Analyst
or
Committee Chairperson
Grant Bailey, +1-212-908-0544
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com