NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned ratings to Towd Point Mortgage Trust 2016-3 (TPMT 2016-3) as follows:
--$656,051,000 class A1 notes 'AAAsf'; Outlook Stable;
--$58,489,000 class A2 notes 'AAsf'; Outlook Stable;
--$50,691,000 class M1 notes 'Asf'; Outlook Stable;
--$42,892,000 class M2 notes 'BBBsf'; Outlook Stable;
--$48,741,000 class B1 notes 'BBsf'; Outlook Stable;
--$32,169,000 class B2 notes 'Bsf'; Outlook Stable;
--$58,489,000 class A2A exchangeable notes 'AAsf'; Outlook Stable;
--$58,489,000 class X1 notional exchangeable notes 'AAsf'; Outlook Stable;
--$58,489,000 class A2B exchangeable notes 'AAsf'; Outlook Stable;
--$58,489,000 class X2 notional exchangeable notes 'AAsf'; Outlook Stable;
--$50,691,000 class M1A exchangeable notes 'Asf'; Outlook Stable;
--$50,691,000 class X3 notional exchangeable notes 'Asf'; Outlook Stable;
--$50,691,000 class M1B exchangeable notes 'Asf'; Outlook Stable;
--$50,691,000 class X4 notional exchangeable notes 'Asf'; Outlook Stable;
--$42,892,000 class M2A exchangeable notes 'BBBsf'; Outlook Stable;
--$42,892,000 class X5 notional exchangeable notes 'BBBsf'; Outlook Stable;
--$42,892,000 class M2B exchangeable notes 'BBBsf'; Outlook Stable;
--$42,892,000 class X6 notional exchangeable notes 'BBBsf'; Outlook Stable.
The following classes are not rated by Fitch:
--$42,891,000 class B3 notes;
--$42,892,896 class B4 notes.
The notes are supported by one collateral group that consisted of 5,356 seasoned performing and re-performing mortgages with a total balance of approximately $974.82 million (which includes $22.25 million, or 2.28%, of the aggregate pool balance in non-interest-bearing deferred principal amounts) as of the cut-off date.
The 'AAAsf' rating on the class A1 notes reflects the 32.70% subordination provided by the 6.00% class A2, 5.20% class M1, 4.40% class M2, 5.00% class B1, 3.30% class B2, 4.40% class B3 and 4.40% class B4 notes.
Fitch's ratings on the notes reflect the credit attributes of the underlying collateral, the quality of the servicers, Select Portfolio Servicing, Inc. (SPS),rated 'RPS1-' and JPMorgan Chase Bank, N.A. (Chase), rated 'RPS2+', and the representation (rep) and warranty framework, minimal due diligence findings and the sequential pay structure.
A customized version of the cash flow assumptions workbook was created to account for the lack of servicer advancing. The delinquency timing scenarios are consistent with the pool's stressed projected default scenarios.
KEY RATING DRIVERS
Distressed Performance History (Concern): The collateral pool consists primarily of peak-vintage seasoned re-performing loans (RPLs), including loans that have been paying for the past 24 months, which Fitch identifies as 'clean current' (80%) and loans that are current but have recent delinquencies or incomplete paystrings are identified as 'dirty current' (20%). All loans were current as of the cutoff date; 81.1% of the loans have received modifications.
Due Diligence Compliance Findings (Concern): The third-party review (TPR) firm's due diligence review resulted in approximately 11% 'C' and 'D' graded loans. For 59 loans, the due diligence results showed issues regarding high cost testing -- the loans were either missing the final HUD1 or used alternate documentation to test -- and therefore a slight upward revision to the model output loss severity (LS) was applied. In addition, timelines were extended on 38 loans which were missing final modification documents.
No Servicer P&I Advances (Mixed): The servicers will not be advancing delinquent monthly payments of principal and interest (P&I), which reduces liquidity to the trust. However, as P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust, the loan-level LS are less for this transaction than for those where the servicer is 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 'AAsf' rated classes.
Sequential-Pay Structure (Mixed): The transaction's cash flow is based on a sequential-pay structure whereby the subordinate classes do not receive principal until the senior classes are repaid in full. Losses are allocated in reverse-sequential order. Furthermore, the provision to re-allocate principal to pay interest on the 'AAAsf' and 'AAsf' rated notes prior to other principal distributions is highly supportive of timely interest payments to those classes, in the absence of servicer advancing.
Potential Interest Deferrals (Mixed): To address the lack of an external P&I advance mechanism, principal otherwise distributable to the notes may be used to pay monthly interest. While this helps provide stability in the cash flows to the high investment grade-rated bonds, the lower rated bonds may experience long periods of interest deferral that will generally not be repaid until such note becomes the most senior outstanding.
Under Fitch's 'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions,' dated June 2016, the agency may assign ratings up to 'Asf' on notes that incur deferrals if such deferrals are permitted under terms of the transaction documents, provided such amounts are fully recovered well in advance of the legal final maturity under the relevant rating stress.
Limited Life of Rep Provider (Concern): FirstKey Mortgage, LLC (FirstKey), as rep provider, will only be obligated to repurchase a loan due to breaches prior to the payment date in August 2017. Thereafter, a reserve fund will be available to cover amounts due to noteholders for loans identified as having rep breaches. Amounts on deposit in the reserve fund, as well as the increased level of subordination, will be available to cover additional defaults and losses resulting from rep weaknesses or breaches occurring on or after the payment date in August 2017. If FirstKey Mortgage, LLC does not fulfill its obligation to repurchase a mortgage loan due to a breach, Cerberus Global Residential Mortgage Opportunity Fund, L.P. (the responsible party) will repurchase the loan.
Tier 2 Representation Framework (Concern): Fitch considers the representation, warranty, and enforcement (RW&E) mechanism construct for this transaction to be consistent with what it views as a Tier 2 framework due to the inclusion of knowledge qualifiers and the exclusion of loans from certain reps as a result of third-party due diligence findings. Thus, Fitch increased its 'AAAsf' loss expectations by roughly 218 bps to account for a potential increase in defaults and losses arising from weaknesses in the reps.
Timing of Recordation and Document Remediation (Neutral): An updated title and tax search, as well as a review to confirm that the mortgage and subsequent assignments were recorded in the relevant local jurisdiction, was also performed. Per the representations provided in the transaction documents all loans have either all been recorded in the appropriate jurisdiction, are in the process of being recorded, or will be sent for recordation within 12 months of the closing date.
While the expected timelines for recordation and remediation are viewed by Fitch as reasonable, Fitch believes that FirstKey's oversight for completion of these activities serves as a strong mitigant to potential delays. In addition, the obligation of FirstKey Mortgage, LLC or Cerberus Global Residential Mortgage Opportunity Fund, L.P. to repurchase loans, for which assignments are not recorded and endorsements are not completed by the payment date in August 2017, aligns the issuer's interests regarding completing the recordation process with those of noteholders.
Clean Current Loans (Positive): Fitch's analysis of loans that have had clean pay histories for 24 months or more found that, for these loans, its loan loss model projected a probability of default (PD) that was more punitive than that indicated by actual delinquency roll rate projections. To account for this difference, Fitch reduced the pool's lifetime default expectations by approximately 11%.
Deferred Amounts (Negative): Non-interest-bearing principal forbearance amounts totaling $22.25 million (2.28% of the unpaid principal balance) are outstanding on 693 loans. Fitch included the deferred amounts when calculating the borrower's LTV and sLTV, despite the lower payment and amounts not being owed during the term of the loan. The inclusion resulted in higher PDs and LS than if there were no deferrals. Fitch believes that borrower default behavior for these loans will resemble that of the higher LTVs, as exit strategies (i.e. sale or refinancing) will be limited relative to those borrowers with more equity in the property.
Third-Party Loan Sale Provisions (Neutral): The transaction permits nonperforming loans and loans classified as real estate-owned (REO) serviced by SPS to be sold to unaffiliated third parties to maximize liquidation proceeds to the issuer. FirstKey as asset manager is responsible for arranging such sales. To ensure that loan sales do not result in losses to the trust that exceed Fitch's expectations, the sale price is floored at a minimum value equal to 59.27% of the unpaid principal balance, which approximates Fitch's 'Bsf' LS expectation. Loans serviced by Chase are not permitted to be sold out of the trust.
Solid Alignment of Interest (Positive): FK Investments WS, LLC (FK Investments), a majority-owned affiliate of FirstKey Mortgage, LLC, will acquire and retain a 5% vertical interest in each class of the securities to be issued.
RATING SENSITIVITIES
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.
Fitch conducted sensitivity analysis determining 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 38.2% at 'AAA'. The analysis indicates 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'.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information, as well as the final Form 15E, from WestCor Land Title Insurance Company (WestCor), Clayton Holdings LLC, and American Mortgage Consultants (AMC)/JCIII & Associates, Inc. (JCIII). The due diligence focused on regulatory compliance, pay history, servicing comments, the presence of key documents in the loan file and data integrity. In addition, Westcor, AMC, and JCIII were retained to perform an updated title and tax search, as well as a review to confirm that the mortgages were recorded in the relevant local jurisdiction and the related assignment chains.
A regulatory compliance and data integrity review was competed on 100% of the pool. A pay history review was conducted on 99% of the pool, and a servicing comment review was completed on approximately 12% of the loans.
Fitch considered this information in its analysis and based on the findings, Fitch made minor adjustments to its analysis.
Fitch made an adjustment on 59 loans that were subject to federal, state, and/or local predatory testing. These loans contained material violations including an inability to test for high cost violations or confirm compliance, which could expose the trust to potential assignee liability. These loans were marked as 'indeterminate'. Typically the HUD issues are related to missing the Final HUD, illegible HUDs, incomplete HUDs due to missing pages, or only having estimated HUDs. The final HUD1 was not used to test for High Cost loans. To mitigate this risk, Fitch assumed a 100% loss severity for loans in the states that fall under Freddie Mac's do not purchase list of 'high cost' or 'high risk'. Six loans were impacted by this approach.
For the remaining 53 loans, where the properties are not located in the states that fall under Freddie Mac's do not purchase list, the likelihood of all loans being high cost is lower. However, Fitch assumes the trust could potentially incur notable legal expenses. Fitch increased its loss severity expectations by 5% for these loans to account for the risk.
There were 38 loans missing modification documents or a signature on modification documents. For these loans, timelines were extended by an additional three months, in addition to the six-month timeline extension applied to the entire pool.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882401
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130
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. 15 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880006
U.S. RMBS Loan Loss Model Criteria (pub. 12 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880673
U.S. RMBS Master Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882350
U.S. RMBS Seasoned and Re-Performing Loan Criteria (pub. 12 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880720
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 17 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881806
Related Research
Towd Point Mortgage Trust 2016-3 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885338
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009748
ABS Due Diligence Form 15E 1
ABS Due Diligence Form 15E 2
ABS Due Diligence Form 15E 3
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009748
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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