NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign the following ratings and Rating Outlooks to RPMLT 2014-1 Trust, Mortgage Pass-Through Certificates, Series 2014-1:
--$328,824,000 class A-1 exchangeable GT certificates 'BBsf'; Outlook Stable;
--$230,176,800 class A-1A exchangeable GT certificates 'BBsf'; Outlook Stable;
--$98,647,200 class A-1B exchangeable GT certificates 'BBsf'; Outlook Stable;
--$164,412,000 class A-1C exchangeable GT certificates 'BBsf'; Outlook Stable;
--$164,412,000 class A-1D exchangeable GT certificates 'BBsf'; Outlook Stable;
--$115,088,400 class A-1E exchangeable REMIC certificates 'BBsf'; Outlook Stable;
--$115,088,400 class A-1F exchangeable REMIC certificates 'BBsf'; Outlook Stable;
--$49,323,500 class A-1G exchangeable REMIC certificates 'BBsf'; Outlook Stable;
--$49,323,500 class A-1H exchangeable REMIC certificates 'BBsf'; Outlook Stable.
The rated classes are collateralized with Group 1 mortgage loans consisting of 3,029 peak-vintage seasoned re-performing loans (RPL) totaling approximately $644.1 million originated by various lenders.
The B1, B-1A through B-1O, B-2, B-2A through B-2N, B-3, and B-3A through B-3Z will not be rated by Fitch.
The 'BBsf' rating on the class A-1E through A-1H certificates reflects the 48.95% subordination provided by the Group 1-B1, 1-B2 and 1-B3 certificates. The RPMLT 2014-1 Trust, mortgage pass-through certificates series 2014-1 (RPMLT 2014-1) comprises two groups of certificates and mortgage pools which are not cross collateralized. Group 1 certificates comprise classes A-1, A-2, A-1A through A-1H, B-1, B-1A through B-1O, B-2, B-2A through B-2N, B-3, and B-3A through B-3Z and class R certificates.
Fitch's rating on the class A-1 certificates reflect the credit attributes of the underlying collateral, Fitch's limited visibility to the primary servicer, the representation (rep) and warranty framework, and repayment structure. Despite the robust level of credit enhancement provide by the 48.95% subordination, the rating was capped at 'BBsf' due to the lack of a Fitch-rated or otherwise formerly reviewed primary servicer participating in the transaction. Fitch believes that the transaction could have achieved a low investment grade (IG) rating with a Fitch-rated or reviewed servicer participation.
KEY RATING DRIVERS
Unrated Servicer: The mortgage loans will be serviced by Rushmore Loan Management Services, which is not rated by Fitch, and there is no master servicer on the transaction. Fitch did conduct conference calls with Rushmore's senior management across functional areas and reviewed supporting materials to gain an understanding of its servicing practices for RPLs, which, in Fitch's limited view, believes to be adequate. Because Fitch did not conduct a full operational review of Rushmore, which encompasses an on-site visit as well as a comprehensive review of the company's key measures and operational quality, Fitch did not have the same level of visibility into the quality of Rushmore's proficiencies as it has with Fitch rated servicers participating in IG rated transactions. This is particularly important given the impact the servicer can have on RPL performance and the transaction's cashflows.
Weak Rep and Warranty Framework: The Sponsor, DLJ Mortgage Capital Inc., a wholly owned subsidiary of Credit Suisse AG (rated 'A'/'F1'; Stable Outlook) is making a limited number of reps to the transaction which sunset whenever the class B-1A certificates are transferred by the initial holder; thereafter, breach payments from a breach account equal to $100,000 is available to cover any rep deficiencies. Of the roughly 34 reps Fitch typically expects to see in an IG transaction, only 13 are included and there is no automatic review of delinquent loans. The very weak rep framework resulted in an increase to Fitch's lifetime loss expectations of approximately 5%.
The loan-level reps and warranties can be found in the 'RPMLT 2014-1 Trust, Mortgage Pass-Through Certificates Series 2014-1' report dated November 2014, available on Fitch's website.
Shifting Interest Pay Structure: The transaction allows for scheduled principal distributions to the subordinated classes as well as a growing share of prepayments after a five-year lock-out period. This structure exposes the rated classes to greater tail risk than a sequential pay structure and results in higher initial subordination levels to protect against defaults against a more backloaded default scenario. It also creates more cash flow uncertainty to the senior bonds given the potential performance variability of RPL collateral.
No P&I Advancing: The servicer is not required to advance delinquent payments of principal and interest (p&i) if not received from the borrower. Positively, the lack of advancing resulted in a loan level average expected loss (EL) roughly 29% versus the 38.5% average EL with advancing costs factored in. To account for the lack of external liquidity Fitch applied delinquency timing scenarios consistent with the pool's stressed projected default scenarios to assess the risk of bond interest shortfalls. In some of Fitch's liquidity stress scenarios the rated classes incurred temporary interest shortfalls but were able to recover full interest within an acceptable timeframe. Fitch's rating criteria allow for temporary interest shortfalls for low investment grade classes as long as the shortfalls are expected to be recovered in full in a stressed scenario.
Interest Shortfall Application: The very high subordination level is also driven by the structural provision that allows for interest on the certificates to be paid from interest received on the loans rather than from total collections. Because of this feature, more subordination, and interest thereon, is needed to cover interest shortfalls to the senior bonds when loans become delinquent versus a structure that allows for available funds, which includes subordinated principal, to pay senior interest. In Fitch's cash flow analysis, all interest shortfalls allocated to the class A-1 certificates were repaid in full no later than month 180 under the agency's six default and loss timing scenarios.
Mixed Due Diligence Results: The sponsor retained third-party review (TPR) firm Clayton Holdings LLC to perform a review of the loans with respect to regulatory compliance, servicing and pay history, title, valuation and data integrity. Clayton attested that the review was conducted in accordance with Fitch's criteria for loan level due diligence in place at the time of the review.
There were no material findings for the servicing and pay history, title, and data integrity reviews. A title search was performed on 100% of the loans which showed no issues that would prohibit a new title policy from being obtained for any of the loans. A 12 month pay history review on a 25% sample of the group 1 and group 2 mortgage loans indicated that pay histories were generally accurate; while a modification data integrity review showed only minor discrepancies primarily attributable to updated data not originally available at the time of the review. However, there were material findings noted for compliance and valuation, which Fitch accounted for in its analysis as described further below.
Regulatory Compliance Violations: Fitch received compliance diligence results for 100% of the aggregate pool (groups 1 and 2). Approximately 25% of the aggregate pool and 13% of the group 1 loans received 'C' or 'D' grades for material violations or lack of documentation. Since these violations could potentially be used by borrowers as a defense to foreclosure which could, in turn, lengthen foreclosure timelines and increase liquidation costs, Fitch increased its loss severity expectations for these loans to account for the risk. The increase was based on the agency's criteria for the treatment of non-Qualified Mortgage loans and resulted in an upward adjustment of roughly 100bps to the pool's loss severity.
Valuation Discrepancies: Approximately 25% of the aggregate pool underwent a valuation review comparing the BPOs provided in the loan level data tape to a second BPO value. For 21% of the loans reviewed, the second BPO was more than 10% less than the BPO value in the tape with an average difference of roughly 20%. To account for this discrepancy in its analysis, Fitch used the lower diligenced values where available and extrapolated the review findings to the rest of the group 1 loans that were not reviewed, which resulted in the application of a 20% property value haircut to roughly 15% of the pool.
Loan Documentation Concerns: While the custodian is required to review each mortgage loan file to determine the presence of certain key documents, noted exceptions are not required to be cleared by the Sponsor. . Since missing documentation could potentially delay the foreclosure process and increase associated costs, Fitch extended its liquidation timelines by up to an additional 12 months to account for potential further delays.
Distressed Credit Histories: Approximately 5.6% of the pool is currently delinquent; while 21% have experienced a delinquency in the past 24 months. Fitch's analysis takes into account each loan's performance history for the past two years. Fitch assumed an increase in the probability of default (PD) for loans with missed payments in the prior 24 months, the magnitude of which was dependent upon how recent the delinquency occurred.
PD Adjustments for Clean Current Loans: Fitch's analysis of the performance of clean current loans - i.e., loans with clean payment histories for the past 24 months - found that its loan loss model projected PDs for those loans are more punitive than those indicated by Fitch's roll rate projections. To account for this, Fitch reduced the lifetime default expectations for the clean current loans, which account for 76.4% of the pool, by approximately 16%.
High Modification Percentage: Almost all of the loans in the pool (approximately 99%) have received one or more loan modifications since origination. Fitch's analysis indicates that a borrowers' probability of re-default is inversely related to the size of the payment reduction from the modification. Therefore, smaller PD penalties were applied to dirty current loans, i.e. those delinquent in the past 24 months, that were modified based on the magnitude of the modified loan's payment reduction.
Payment Shock for Rate Resets: Roughly 73% of the loans in the pool were originated as hybrid adjustable rate mortgages, with initial fixed rate periods of 5, 7, or 10 years, of which 68% have been modified in step rate loans. These loans are subject to coupons that step up gradually over time, increasing the borrower's monthly payment. To account for this payment shock risk, the pool's lifetime default expectations were increased by 1.14x.
Sustainable MVD: Fitch's gross loss model utilizes sustainable market value declines (sMVDs) to estimate the sale value of a property. The sMVD assumptions applied for computing LS are consistent with those used in the agency's sLTV and default probability calculation. Fitch's sustainable home price (SHP) model suggests home prices for the pool are overvalued by roughly 6%, resulting in a sustainable LTV of approximately 118.7%.
Low Loan Balances: The average loan balance of $212,652 is low compared to new issue jumbo transactions rated by Fitch. Fitch's loan loss model assumes a set amount of fixed cost for liquidation of a property given default. Therefore, for loans with low principal balances, the assumed costs account for a higher percentage of the loan balance, resulting in higher loss severities at liquidation.
Fitch's analysis incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper MVDs than assumed at the state or 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 be considered in the surveillance of the transaction. Two sets of sensitivity analyses were conducted at the state and national level to assess the effect of higher MVDs for the subject pool.
The 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% for the rated class A-1 certificates, respectively. The analysis indicates that there is some potential rating migration with higher MVDs, compared with the model projection.
Fitch also conducted defined rating sensitivities which determine the stresses to MVDs that would reduce a rating by one full category and to 'CCCsf'. For example, an additional MVD stress of 9% would potentially reduce the 'BB-sf' rated class down one rating category to 'B-sf'.
Key Rating Drivers and Rating Sensitivities are further detailed in Fitch's accompanying presale report, available at 'www.fitchratings.com' or by clicking on the above link.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--Global Structured Finance Rating Criteria (May 2014);
--U.S. RMBS Mortgage Loan Loss Model Criteria (November 2014);
--U.S. RMBS Master Rating Criteria (July 2014);
--U.S. RMBS Cash Flow Analysis Criteria (April 2014);
--Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (February 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);
--'Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers' (January 2014).
Applicable Criteria and Related Research: RPMLT 2014-1 Trust, Mortgage Pass-Through Certificates, Series 2014-1 -- Appendix
Global Structured Finance Rating Criteria - Effective from 20 May 2014 to 4 August 2014
U.S. RMBS Master Rating Criteria
U.S. RMBS Cash Flow Analysis Criteria
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes