NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to rate Chase Mortgage Trust 2016-1 (CMT 2016-1) as follows:
--$1,656,006,000 class A certificates 'AAAsf'; Outlook Stable;
--$42,462,000 class M-1 certificates 'AA-sf'; Outlook Stable;
--$74,544,000 class M-2 certificates 'Asf'; Outlook Stable;
--$50,010,000 class M-3 certificates 'BBBsf'; Outlook Stable;
--$25,477,000 class M-4 certificates 'BBsf'; Outlook Stable.
Fitch will not be rating the $38,688,000 class B certificates.
This is the first RMBS transaction that Fitch is aware in which the issuer intends to comply with the conditions set forth in the Federal Deposit Insurance Corp. (FDIC) Securitization Safe Harbor Rule, (the Rule) in order to benefit from the safe harbor. The FDIC confirms legal isolation of the securitized assets from the seller in the case of its insolvency if the issuer complies with the conditions in the Rule.
The certificates are supported by 6,111 very high quality prime jumbo and agency conforming loans with a total balance of approximately $1.887 billion as of the cutoff date. Credit enhancement for the 'AAAsf' certificates of 12.25% reflects Fitch's loss expectations of 8.25% plus structural features such as the full pro rata pay structure, the lack of principal and interest advances, and the servicing incentive fees paid from available funds. Fitch believes that many of the Safe Harbor Rule requirements align the interests of the sponsor and originator with those of the certificateholders and are credit positive for the transaction as outlined below.
KEY RATING DRIVERS
Above-Average Originator: Based on its review of JPMorgan Chase Bank, N.A. (Chase) origination platform for agency and non-agency loans, Fitch believes that the bank has strong processes and procedures in place and views its ability to originate agency and non-agency loans as above average. Fitch reduced its probability of default by 77 basis points (bps) at the 'AAAsf' stress scenario to account for the strong operational quality of the loans.
High-Quality Fixed-Rate Mortgages: The transaction includes a mix of conforming (75%) and non-conforming collateral (25%) made to prime quality borrowers. All of the loans were originated either by Chase or by one of its correspondents in accordance with its relevant guidelines. The collateral consists of up to 30-year fixed-rate mortgage loans and is seasoned roughly 14 months.
Strong Due Diligence Results: Loan level due diligence was performed on 100% of the non-conforming loans and a statistical sample for the agency loans. The diligence sample size and scope for the agency loans are consistent with those of other risk-sharing transactions referencing Chase mortgage collateral and rated by Fitch. All but 17 loans received an initial 'A' or 'B' grade, indicating strong underwriting practices and sound quality control procedures.
Increased Credit Enhancement: The 12.25% initial credit enhancement for the 'AAAsf' certificates is materially higher than Fitch's 'AAAsf' mortgage pool loss expectation of 8.25%, reflecting structural features such as the lack of delinquent principal and interest advances, a pro rata principal distribution and the servicing incentive fees and other expenses paid from available funds.
No Servicer P&I Advances: While the Rule allows for servicing advancing up to a maximum of 90 days, this transaction is not incorporating any advancing of delinquent principal and interest (P&I). As P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust, the loan-level loss severities (LS) are less for this transaction than for those where the servicers are 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 'AA-sf' rated classes.
Pro Rata Structure: Unlike prime jumbo securitizations issued post crisis, this transaction will incorporate a pro rata principal distribution among all classes starting at the first payment date. This allows for a larger amount of principal distributed to the subordinate bonds and a faster depletion of credit enhancement than a standard shifting interest structure. However, the transaction incorporates various performance triggers that can lock the subordinate bonds out of principal, and a subordination floor of 55 bps prevents distributions to the subordinate bonds to protect against adverse selection risk as the collateral pool pays down. The initial credit enhancement reflects the probability of subordinate balance paydowns over time.
Strong Alignment of Interests: Because the Rule requires the sponsor, Chase, to retain an economic interest of at least 5% of the credit risk of the securitized assets, Fitch believes the transaction benefits from a strong alignment of interest in the credit risk of the underlying collateral. The sponsor intends to retain a 5% vertical interest in each class of certificates (other than the class A-R certificates).
Loan Compliance Representation and Warranty: The Rule requires that the loan documents for an RMBS transaction contain an additional representation regarding loan underwriting compliance with supervisory guidance governing the underwriting of residential mortgages, including the Interagency Guidance on Non-Traditional Mortgage Products, Oct. 5, 2006, and the Interagency Statement on Subprime Mortgage Lending, July 10, 2007, and such other or additional guidance applicable at the time of loan origination, which, in Fitch's view, provides additional assurances about the sound quality of the underlying pool.
Rep and Warranty Qualifiers: While the Rule for RMBS requires that 5% of the cash proceeds due to the sponsor be held in a reserve fund for 12 months for loan repurchases due to breaches of reps and warranties, which further aligns the interests of the seller with those of the certificateholders, many of the reps contain qualifying or conditional language that could result in fewer loan repurchases. For this reason, Fitch increased the probability of default for the 'AAAsf' class by 67 bps.
Servicing Framework to Benefit All Classes: The Rule requires that RMBS loan servicing be conducted in accordance with best practices for asset management; loss mitigation to commence when a loan becomes 90 days delinquent; and that incentive fees be paid for loan restructuring or other loss mitigation activities that maximize the net present value of the loans. This requirement, which also mandates that records be kept for subsequent review by the trustee or an investor representative, is intended to protect all classes from potentially detrimental activities that benefit one class of investors at the expense of another. Servicing incentive fees are paid from available funds.
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. Two 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 MVDs at the national level. The analysis assumes MVDs of 10%, 20% and 30%, in addition to the model projected 5.5%. 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'. For example, additional MVD of 6%, 31% and 52% could potentially lower the 'AAAsf' rated class one rating category, to non-investment grade, and to 'CCCsf'.
Fitch's stress and rating sensitivity analysis are discussed in its presale report released today 'Chase Mortgage Trust 2016-1', available at 'www.fitchratings.com' or by clicking on the link.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from AMC Diligence, LLC (AMC) on 100% of the non-agency loans and a statistical sample of the conforming balance loans in the collateral pool, which amounted to 15%. Fitch received certifications indicating that the loan-level due diligence was conducted in accordance with its published standards for reviewing loans and in accordance with the independence standards outlined in its criteria. The diligence results showed minimal findings with some nonmaterial exceptions or waivers. All such findings were sufficiently mitigated with compensating factors. Fitch believes the overall results of the review generally reflected strong underwriting controls.
CRITERIA APPLICATION
Fitch analyzed the transaction in accordance with its RMBS rating criteria, as described in its January 2016 report, 'U.S. RMBS Master Rating Criteria.' This incorporates a review of the originators' lending platforms, as well as an assessment of the transaction's R&Ws provided by the originators and arranger, which were found to be consistent with the ratings assigned to the certificates.
An exception was made to Fitch's 'U.S. RMBS Cash Flow Analysis Criteria' with respect to the delinquency rate vectors used to analyze structures with limited or no servicer advancing mechanism. The delinquency rate vectors used are still derived from Fitch's front-loaded, mid-loaded and back-loaded CDR curves; however, rather than use an 18-month liquidation timeline, the assumed liquidation timelines will be based on each rating category's projected timelines. In addition, a recovery rate based on the adjusted probability of default and cure rate adjustment (CRA), as described in Fitch's 'Exposure Draft: U.S. RMBS Loan Loss Model Criteria,' was incorporated.
The structure of the transaction does not apply interest on deferred interest amounts, which is inconsistent with Fitch's 'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions' for high investment-grade ratings. Given that Fitch rates to the terms of a transaction and the deferred amount can be factored into the investor's economic investment decision prior to investing, Fitch did not deem this exception as material.
In accordance with its 'U.S. RMBS Master Rating Criteria', Fitch looks for a true sale opinion for RMBS. This transaction is structured in accordance with the FDIC's Safe Harbor Rule so no true sale opinion is necessary. Fitch received an opinion addressing the treatment of the assets in connection with this transaction with respect to the FDIC Securitization Safe Harbor Rule.
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'.
Chase Mortgage Trust 2016-1 (US RMBS)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878641
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868
Exposure Draft: U.S. RMBS Loan Loss Model Criteria (pub. 08 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874961
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864368
U.S. RMBS Cash Flow Analysis Criteria (pub. 06 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863973
U.S. RMBS Loan Loss Model Criteria (pub. 03 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868923
U.S. RMBS Master Rating Criteria (pub. 21 Jan 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876378
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 01 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866259
Related Research
Chase Mortgage Trust 2016-1 Presale Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878683
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000900
ABS Due Diligence Form 15E 1
ABS Due Diligence Form 15E 2
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000900
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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