NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign the following ratings and Rating Outlooks to Fannie Mae's eight risk transfer transaction, Connecticut Avenue Securities, series 2015-C03:
--$254,975,000 class 1M-1 notes 'BBB-sf'; Outlook Stable.
--$257,451,000 class 2M-1 notes 'BBB-sf'; Outlook Stable.
The following classes will not be rated by Fitch:
--$27,192,696,144 class 1A-H reference tranche;
--$13,420,442 class 1M-1H reference tranche;
--$644,149,000 class 1M-2 notes;
--$33,902,644 class 1M-2H reference tranche;
--$113,008,608 class 1B-H reference tranche;
--$19,221,011,441 class 2A-H reference tranche;
--$13,550,205 class 2M-1H reference tranche;
--$400,479,000 class 2M-2 notes;
--$21,078,432 class 2M-2H reference tranche;
--$160,593,307 class 2B-H reference tranche.
The 'BBB-sf' rating for the 1M-1 notes reflects the 2.80% subordination provided by the 2.40% class 1M-2 notes and the non-offered 0.40% 1B-H reference tranche. The 'BBB-sf' rating for the 2M-1 notes reflects the 2.90% subordination provided by the 2.10% class 2M-2 notes and the non-offered 0.80% 2B-H reference tranche. The notes are general senior unsecured obligations of Fannie Mae (rated 'AAA', Outlook Stable) subject to the credit and principal payment risk of a pool of certain residential mortgage loans held in various Fannie Mae-guaranteed MBS.
The reference pool of mortgages will be divided into two loan groups. Group 1 will consist of mortgage loans with loan-to-values (LTVs) of less than or equal to 80% while group 2 will consist of mortgage loans with LTVs greater than 80% and less than or equal to 97%. Each loan group has its own loss severity schedule and issued notes. There will be no cross-collateralization. Aside from distinct loss severity schedules, each group's structure will be identical.
Connecticut Avenue Securities, series 2015-C03 (CAS 2015-C03) is Fannie Mae's eighth risk transfer transaction issued as part of the Federal Housing Finance Agency's Conservatorship Strategic Plan for 2013 - 2017 for each of the government sponsored enterprises (GSEs) to demonstrate the viability of multiple types of risk transfer transactions involving single family mortgages.
The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to a $48.33 billion pool of mortgage loans currently held in previously issued MBS guaranteed by Fannie Mae where principal repayment of the notes are subject to the performance of a reference pool of mortgage loans. As loans become 180 days delinquent or other credit events occur, the outstanding principal balance of the debt notes will be reduced by a pre-defined, tiered loss severity percentage related to those credit events.
While the transaction structure simulates the behavior and credit risk of traditional RMBS mezzanine and subordinate securities, Fannie Mae will be responsible for making monthly payments of interest and principal to investors. Because of the counterparty dependence on Fannie Mae, Fitch's expected rating on the 1M-1 and 2M-1 notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement available through subordination; and Fannie Mae's Issuer Default Rating. The 1M-1 and 2M-1 notes will be issued as uncapped LIBOR-based floaters and will carry a 10-year legal final maturity.
KEY RATING DRIVERS
Home Prices Closer to Sustainable: Nationally, home price growth has moderated while economic growth has continued at a steady pace, keeping prices near sustainable levels nationally, while some overvalued regional markets have seen reductions in the model's sMVD values over the last quarter. In particular, economic improvements have been strong and outpaced price growth in Denver, Los Angeles, Washington DC, Dallas, and Chicago, which rank amongst the largest contributing MSAs to these pools. As a result, the base sustainable loan-to-value (sLTV) decreased 1.4% to 78.2% and 92.5% for group 1 and group 2, respectively, from the prior quarterly projections.
Slight FICO and CLTV Drift: Although the weighted average (WA) FICO score of 747 for Group 1 is the same compared to CAS 2015-C02, the percentage of loans with FICOs less than 720 increased to 28.7% from 28%. In addition, there are more loans with a combined loan-to-value (CLTV) ratio over 80% at 7.3% compared to 6.6%. The subject pool for Group 2 consists of more loans with FICOs less than 720 at 28.4% compared to 27% in the prior transaction.
Fixed Loss Severity: One of the unique structural features of the transaction is a fixed loss severity (LS) schedule tied to cumulative net credit events. If actual loan LS is above the set schedule, Fannie Mae absorbs the higher losses. Fitch views the fixed LS positively, as it reduces the uncertainty that may arise due to future changes in Fannie Mae's loss mitigation or loan modification policies. The fixed severity also offers investors greater protection against natural disaster events where properties are severely damaged, as well as in cases of limited or no recourse to insurance.
10-Year Hard Maturity: The 1M-1, 1M-2, 2M-1 and 2M-2 notes benefit from a 10-year legal final maturity. As a result, any collateral losses on the reference pool that occur beyond year 10 are borne by Fannie Mae and do not affect the transaction. Fitch accounted for the 10-year hard maturity window in its default analysis and applied a reduction to its lifetime default expectations. The credit ranged from 8% at the 'Asf' rating category to 12% at the 'BBsf' rating category.
Advantageous Payment Priority: The payment priority of M-1 notes will result in a shorter life and more stable CE than mezzanine classes in private-label (PL) RMBS, providing a relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full pro-rata share of the pool's unscheduled principal payment until year 10, the M-1 notes can receive a full pro-rata share of unscheduled principal immediately, as long as a minimum CE level is maintained. Additionally, unlike PL mezzanine classes, which lose subordination over time due to scheduled principal payments to more junior classes, the M-2 and B-H classes in each group will not receive any scheduled or unscheduled allocations until their M-1 classes are paid in full. The B-H classes will not receive any scheduled or unscheduled principal allocations until the M-2 classes are paid in full.
Limited Size/Scope of Third-Party Diligence: Only 608 loans of those eligible to be included in the reference pool were selected for a full review (credit, property valuation and compliance) by a third-party diligence provider. Of the 608 loans, 530 were part of this transaction's reference pool (310 in Group 1 and 220 in Group 2). The sample selection was limited to a population of 7,010 loans that were previously reviewed by Fannie Mae and met the reference pool's eligibility criteria. Furthermore, the third-party due diligence scope was limited to reflect Fannie Mae's post-close loan review for compliance. Fitch's review of Fannie Mae's risk management and quality control (QC) process/infrastructure, which has been significantly improved over the past several years, indicates a robust control environment that should minimize loan quality risk.
Solid Alignment of Interests: While the transaction is designed to transfer credit risk to private investors, Fitch believes that it benefits from a solid alignment of interests. Fannie Mae will be retaining credit risk in the transaction by holding the A-H senior reference tranches, which have a loss protection of 3.75% in Group 1 and 4.25% in Group 2, as well as the first loss B-H reference tranches, sized at 40 bps and 80 bps, respectively. Fannie Mae is also retaining an approximately 5% vertical slice/interest in the M-1 and M-2 tranches for Group 1 and 2, respectively.
Rep and Warranty Gaps: While the loan defect risk for 2015-C02 is notably lower than for agency and non-agency mortgage pools securitized prior to 2009, Fitch believes the risk is greater for this transaction than for recently issued U.S. PL RMBS. Notably, neither Fannie Mae nor an independent third party will conduct loan file reviews for credit events, and Fannie Mae will not conduct any reviews of loans from a seller once it files for bankruptcy. Fitch incorporated this risk into its analysis by treating all historical repurchases as if they were defaulted loans that were not repurchased. Consequently, the rating analysis includes an assumption that the loans will experience defect rates consistent with historical rates, and that those defects will not be repurchased.
Special Hazard Leakage Slightly Mitigated: Starting from CAS 2015-C01, a reversal of a credit event is now permissible if the borrower subject to a special hazard event becomes current at the end of a forbearance period following the event. While bondholders would experience temporary principal writedowns and lower interest payments during this period, Fitch views this feature slightly more positively relative to earlier CAS transactions, since the reduction in credit protection for temporary borrower delinquencies arising from natural disasters that typically cure may be reversed.
Receivership Risk Considered: Under the Federal Housing Finance Regulatory Reform Act, the Federal Housing Finance Agency (FHFA) must place Fannie Mae into receivership if it determines that Fannie Mae's assets are less than its obligations for more than 60 days following the deadline of its SEC filing, as well as for other reasons. As receiver, FHFA could repudiate any contract entered into by Fannie Mae if it is determined that the termination of such contract would promote an orderly administration of Fannie Mae's affairs. Fitch believes that the U.S. government will continue to support Fannie Mae, which is reflected in its current rating of Fannie Mae. However, if, at some point, Fitch views the support as being reduced and receivership likely, the ratings of Fannie Mae could be downgraded and the M-1 notes' ratings affected.
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.
This defined stress sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MDVs of 10%, 20%, and 30%, in addition to the model-projected 22% at the 'BBB-sf' level% for Group 1 and 20.9% at the 'BBB-sf' level for Group 2. 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, to non-investment grade, and to 'CCCsf'. For example, additional MVDs of 11%, 7% and 28% would potentially reduce the Group 1 'BBB-sf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively. An additional MVDs of 12%, 8% and 33% would potentially reduce the Group 2 'BBB-sf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from Clayton Holdings LLC. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. Fitch considered this information in its analysis and the findings did not have an impact on loss expectations.
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 by Fannie Mae.
Connecticut Avenue Securities, Series 2015-C03 (US RMBS)
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 09 Mar 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)
U.S. RMBS Cash Flow Analysis Criteria (pub. 06 Apr 2015)
U.S. RMBS Loan Loss Model Criteria (pub. 17 Nov 2014)
U.S. RMBS Master Rating Criteria (pub. 12 Jun 2015)
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 01 Jun 2015)
Dodd-Frank Rating Information Disclosure Form