NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned ratings to Fannie Mae's risk transfer transaction, Connecticut Avenue Securities, series 2016-C07 (CAS 2016-C07), as follows:
--$192,504,000 class 2M-1 notes 'BBB-sf'; Outlook Stable;
--$139,031,000 class 2M-2A notes 'BB+sf'; Outlook Stable;
--$310,146,000 class 2M-2B notes 'Bsf'; Outlook Stable;
--$449,177,000 class 2M-2 exchangeable notes 'Bsf'; Outlook Stable;
--$139,031,000 class 2M-2I exchangeable notional notes 'BB+sf'; Outlook Stable;
--$139,031,000 class 2M-2R exchangeable notes 'BB+sf'; Outlook Stable;
--$139,031,000 class 2M-2S exchangeable notes 'BB+sf'; Outlook Stable;
--$139,031,000 class 2M-2T exchangeable notes 'BB+sf'; Outlook Stable;
--$139,031,000 class 2M-2U exchangeable notes 'BB+sf'; Outlook Stable.
The following classes will not be rated by Fitch:
--$21,614,589,756 class 2A-H reference tranche;
--$10,132,779 class 2M-1H reference tranche;
--$7,317,785 class 2M-AH reference tranche;
--$16,324,366 class 2M-BH reference tranche;
--$60,000,000 class 2B notes;
--$165,151,976 class 2B-H reference tranche.
The 'BBB-sf' rating for the 2M-1 note reflects the 3.10% subordination provided by the 0.65% class 2M-2A note, the 1.45% class 2M-2B and the 1.00% 2B note, and their corresponding reference tranches. 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 consist of mortgage loans with LTVs greater than 80.01% and less than or equal to 97.00%.
Connecticut Avenue Securities, series 2016-C07 (CAS 2016-C07) is Fannie Mae's 16th 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 $22.5 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 liquidate, are modified or other credit events occur, the outstanding principal balance of the debt notes will be reduced by the loan's actual 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 2M-1, 2M-2A and 2M-2B notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement (CE) available through subordination; and Fannie Mae's Issuer Default Rating. The notes will be issued as uncapped LIBOR-based floaters and will carry a 12.5-year legal final maturity.
KEY RATING DRIVERS
High Quality Mortgage Pool (Positive): The reference mortgage loan pool consists of high quality mortgage loans that were acquired by Fannie Mae from January 2016 through April 2016. In this transaction, Fannie Mae has only included one group of loans with loan-to-value ratios (LTVs) from 80.01%-97.00%. Overall, the reference pool's collateral characteristics are similar to recent CAS transactions and reflect the strong credit profile of post-crisis mortgage originations.
Actual Loss Severities (Neutral): This will be Fannie Mae's eighth actual loss risk transfer transaction in which losses borne by the noteholders will not be based on a fixed loss severity (LS) schedule. The notes in this transaction will experience losses realized at the time of liquidation or modification, which will include both lost principal and delinquent or reduced interest.
Mortgage Insurance Guaranteed by Fannie Mae (Positive): The majority of the loans in the pool are covered either by borrower-paid mortgage insurance (BPMI) or lender-paid MI (LPMI). Fannie Mae will be guaranteeing the mortgage insurance (MI) coverage amount, which will typically be the MI coverage percentage multiplied by the sum of the unpaid principal balance as of the date of the default, up to 36 months of delinquent interest, taxes, and maintenance expenses. While the Fannie Mae guarantee allows for credit to be given to MI, Fitch applied a haircut to the amount of BPMI available due to the automatic termination provision as required by the Homeowners Protection Act when the loan balance is first scheduled to reach 78%.
12.5-Year Hard Maturity (Positive): The 2M-1, 2M-2A, 2M-2B, and 2B notes benefit from a 12.5-year legal final maturity. As a result, any collateral losses on the reference pool that occur beyond year 12.5 are borne by Fannie Mae and do not affect the transaction. Fitch accounted for the 12.5-year window in its default analysis and applied a reduction to its lifetime default expectations.
Limited Size/Scope of Third-Party Diligence (Neutral): This is the fourth transaction in which Fitch received third-party due diligence on a loan production basis as opposed to a transaction-specific review. Fitch believes that regular, periodic third-party reviews (TPRs) conducted on a loan production basis are sufficient for validating Fannie Mae's quality control (QC) processes. The sample selection was limited to a population of 7,391 loans that were previously reviewed as part of Fannie Mae's post-purchase QC review and met the reference pool's eligibility criteria. Of those loans, 1,998 were selected for a full review (credit, property valuation, and compliance) by third-party due diligence providers. Of the 1,998 loans, 347 were part of this transaction's reference pool. Fitch views the results of the due diligence review as consistent with its opinion of Fannie Mae as an above-average aggregator; as a result, no adjustments were made to Fitch's loss expectations based on due diligence.
Advantageous Payment Priority (Positive): The 2M-1 class strongly benefits from the sequential pay structure and stable CE provided by the more junior 2M-2A, 2M-2B, and 2B classes which are locked out from receiving any principal until classes with a more senior payment priority are paid in full. However, available CE for the junior classes as a percentage of the outstanding reference pool increases in tandem with the paydown of the 2M-1 class. Given the size of the 2M-1 class relative to the combined total of all the junior classes, together with the sequential pay structure, the class 2M-1 will de-lever and CE as a percentage will build faster than in a pro rata payment structure.
Solid Alignment of Interests (Positive): 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 2A-H senior reference tranches, which have an initial loss protection of 4.00%, as well as at least 50% of the first loss 2B-H reference tranche, sized at 73 bps. Fannie Mae is also retaining an approximately 5% vertical slice/interest in the 2M-1, 2M-2A, and 2M-2B tranches.
Receivership Risk Considered (Neutral): 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; this is reflected in our 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 2M-1, 2M-2A, and 2M-2B 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 MVDs of 10%, 20%, and 30%, in addition to the model-projected 23.4% at the 'BBBsf' level and 18.6% at the 'BBsf' level. 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%, 11% and 35% would potentially reduce the 'BBBsf' 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 Adfitech, Inc. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. Adfitech examined selected loan files with respect to the presence or absence of relevant documents. Fitch received certifications indicating that the loan-level due diligence was conducted in accordance with Fitch's published standards. The certifications also stated that the company performed its work in accordance with the independence standards, per Fitch's criteria, and that the due diligence analysts performing the review met Fitch's criteria of minimum years of experience. Fitch considered this information in its analysis and the findings did not have an impact on the analysis.
The offering documents for CAS 2016-C07 do not disclose any representations, warranties, or enforcement mechanisms (RW&Es) that are available to investors and which relate to the underlying asset pools. Please see Fitch's Special Report for further information regarding Fitch's approach to the disclosure of a transaction's RW&Es as required under SEC Rule 17g-7.
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.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
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. 29 Nov 2016)
U.S. RMBS Master Rating Criteria (pub. 01 Dec 2016)
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 15 Nov 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.