NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to rate COLT 2016-1 Mortgage Loan Trust (COLT 2016-1) as follows:
--$89,424,000 class A-1 certificates 'Asf'; Outlook Stable;
--$89,424,000 class A-1X certificates 'Asf'; Outlook Stable;
--$48,351,000 class A-2 certificates 'BBBsf'; Outlook Stable;
--$48,351,000 class A-2X certificates 'BBBsf'; Outlook Stable;
--$9,056,000 class M-1 certificates 'BBsf'; Outlook Stable.
Fitch will not be rating the following certificates:
--$14,877,659 class M-2 certificates.
This is the first Fitch-rated RMBS transaction issued post-crisis that consists primarily of newly originated, non-prime mortgage loans. All of the mortgage loans were originated by Caliber Home Loans, Inc. (Caliber). The transaction is collateralized with 51% non-qualified (Non-QM) mortgages as defined by the Ability to Repay (ATR) rule while 41% is designated as Higher Priced-QM and the remainder either meets the criteria for Safe Harbor QM or ATR does not apply. Due to Caliber's limited performance history of non-prime loans, Fitch capped the highest achievable rating at 'Asf'.
The certificates are supported by a pool of 368 mortgage loans with credit scores (701) similar to legacy Alt-A collateral. However, unlike legacy originations, the loans were underwritten to comprehensive Appendix Q documentation standards and 100% due diligence was performed confirming adherence to the guidelines. Fitch also notes Caliber's sound operational controls, which are expected to result in better loan performance than pre-crisis loans with similar reported attributes. The weighted average loan-to value ratio is roughly 79% and many of the borrowers have significant liquid reserves. The transaction also benefits from an alignment of interest as LSRMF Acquisitions I or a majority owned affiliate, affiliates of Caliber, will be retaining a 5% vertical interest in the offered certificates as part of risk retention requirements.
Fitch applied a default penalty to 47% of the pool to account for borrowers with a mortgage derogatory as recent as two years prior to obtaining the new mortgage; increased its non-QM loss severity penalty to account for potentially greater number of challenges to the ATR Rule; and applied a loan concentration penalty due to the large loan balances that make up 25% of the pool by dollar amount but just 7% by count.
Initial credit enhancement for the class A-1 certificates of 44.7% is substantially above Fitch's 'Asf' rating stress loss of 19.50%. The additional initial credit enhancement is primarily driven by the pro rata principal distribution between the A-1 and A-2 certificates, which will result in a significant reduction of the class A-1 subordination over time through principal payments to the A-2. The certificate sizing also reflects the allocation of collateral principal to pay only principal on the certificates and collateral interest to pay only certificate interest. Both of these features resulted in higher initial subordination to ensure that principal and ultimate interest (with interest accrued on deferred amounts) are paid in full by maturity under each class's respective rating stress scenario.
KEY RATING DRIVERS
New Asset Class (Concern): Due to the limited non-prime performance to date of the asset manager, Hudson Americas L.P. (Hudson), and originator of the loans, Caliber, Fitch capped the highest possible initial rating at 'Asf'. As more post-crisis non-prime performance history is established while upholding appropriate underwriting and operational controls, Fitch will consider a higher rating in the future.
Non-Prime Credit Quality (Concern): The credit scores (on average, 701) resemble legacy Alt-A collateral and the pool was analyzed using Fitch's Alt-A model with positive adjustments made to account for the improved operational quality, due diligence review, and presence of liquid reserves, and negative adjustments to reflect the concentration of borrowers (47%) with recent credit events, increased risk of ATR rule challenges and loans with TILA RESPA Integrated Disclosure (TRID) exceptions.
Appendix Q Compliant (Positive): Although not required for Non-QM, all loans in the mortgage pool were underwritten to the comprehensive Appendix Q documentation standards defined by ATR. While a due diligence review identified roughly 10% of loans as having minor variations to Appendix Q and would therefore not meet the documentation standards for QM, Fitch views those differences as immaterial and all loans as having full income documentation.
Operational and Data Quality (Positive): Fitch reviewed Caliber's and Hudson's origination and acquisition platforms and found them to have sound underwriting and operational control environments, reflecting industry improvements following the financial crisis that are expected to reduce risk related to misrepresentation and data quality. All loans in the mortgage pool were reviewed by a third party due diligence firm and the results indicated strong underwriting and property valuation controls.
Alignment of Interests (Positive): The transaction benefits from an alignment of interests between the issuer and investors. LSRMF Acquisition I, LLC as sponsor and securitizer will be retaining at least a 5% vertical interest in each class of offered certificates. In addition, the mezzanine certificates, representing 14.80% of the transaction will be retained by LSRMF, or an affiliate, as part of its focus on investing in residential mortgage credit. Lastly, the rep and warranties provided by Caliber, which is owned by LSRMF affiliates, also aligns the interest of the investors with those of LSRMF to maintain high quality origination standards and sound performance, as Caliber will be obligated to repurchase loans due to rep breaches.
Modified Sequential Payment Structure (Mixed): The structure distributes collected principal pro rata among the class A certificates while shutting out the subordinate certificates from principal until both classes have been reduced to zero. To the extent that either the Cumulative Loss Trigger Event or the Credit Enhancement Trigger Event fail in a given period, principal will be distributed sequentially to the A-1 and A-2 bonds until they are reduced to zero.
Servicing and Master Servicer (Positive): Servicing will be performed by Caliber, which Fitch rates 'RPS2-', Outlook Negative, due to its fast growing portfolio and regulatory scrutiny. Wells Fargo, rated 'RMS1', Outlook Stable, will act as master servicer and securities administrator. Advances required but not paid by Caliber will be paid by Wells Fargo.
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 7.2%. 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 'COLT 2016-1 Mortgage Loan Trust', 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 loans in the collateral pool. 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. In addition, AMC identified 50 loans as having TRID errors, 38 of which were identified as potentially at risk for statutory damages. Fitch increased its loss severity as described below in criteria application to account for this risk. All such findings were sufficiently mitigated with compensating factors. Fitch believes the overall results of the review generally reflected strong underwriting controls.
A variation was made to Fitch's 'U.S. RMBS Loan Loss Model Criteria' in regards to treatment of loans with prior credit events. Historical data suggests that borrowers with similar credit scores as those in the pool are nearly 20% more likely to default on a future mortgage, as compared to all outstanding borrowers, if they had a prior mortgage related credit event. This adjustment was applied to the roughly 47% of the pool that had a prior mortgage related credit event, resulting in nearly a 9% increase to the pool's probability of default at each rating category.
A variation was made to Fitch's 'U.S. RMBS master Rating Criteria' for loans with potential TRID violations. Under this approach loans with TRID findings that are more likely to lead to statutory damages received an additional $15,500 to their projected loss. Out of the 50 loans with TRID errors, 38 received this adjustment increasing the expected loss by 36 basis points (bps).
Due to the structural features of the transaction, Fitch analyzed the collateral with customized versions of two of its standard models. Fitch's Alt-A Loan Loss Model was altered to include three additional inputs; due diligence percentage, operational quality and liquid reserves. These variables were not common in legacy Alt-A loans and were excluded in the derivation of Fitch's Alt-A model. Given the improvement in today's underwriting over legacy standards, these aspects were taken into consideration and a net credit was applied to the pool. The second customized model was based off of Fitch's Cash Flow Assumptions workbook. The customized version was used to account for the limited servicer advancing. The delinquency timing scenarios are consistent with the pool's stressed projected default scenarios.
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'.
COLT 2016-1 Mortgage Loan Trust (US RMBS)
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)
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. 15 Apr 2016)
U.S. RMBS Loan Loss Model Criteria (pub. 12 May 2016)
U.S. RMBS Master Rating Criteria (pub. 21 Jan 2016)
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 21 Apr 2016)
COLT 2016-1 Appendix
Dodd-Frank Rating Information Disclosure Form
ABS Due Diligence Form 15E 1
ABS Due Diligence Form 15E 2