Fitch Expects to Rate Towd Point Mortgage Trust 2016-4; Presale Issued
--$393,420,000 class A1 notes 'AAAsf'; Outlook Stable.
The following classes will not be rated by Fitch:
--$42,199,000 class A2 notes;
--$40,900,000 class M1 notes;
--$27,267,000 class M2 notes;
--$31,811,000 class B1 notes;
--$19,477,000 class B2 notes;
--$18,178,000 class B3 notes;
--$38,303,000 class B4 notes;
--$37,654,533 class B5 notes.
The notes are supported by one collateral group that consisted of 3,383 seasoned performing and re-performing mortgages with a total balance of approximately $649.21 million (which includes $36.57 million, or 5.63%, 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 39.40% subordination provided by the 6.50% class A2, 6.30% class M1, 4.20% class M2, 4.90% class B1, 3.00% class B2, 2.80% class B3, 5.90% class B4 and 5.80% class B5 notes.
Fitch's ratings on the class notes reflect the credit attributes of the underlying collateral, the quality of the servicers: Select Portfolio Servicing, Inc. (SPS),rated 'RPS1-' and Wells Fargo Bank, N. A. (Wells), rated 'RPS1-', and the representation (rep) and warranty framework, minimal due diligence findings and the sequential pay structure.
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' (61%), and loans that are current but have recent delinquencies or incomplete paystrings, identified as 'dirty current' (39%). All loans were current as of the cutoff date; 71.1% of the loans have received modifications.
Due Diligence Compliance Findings (Concern): The third-party review (TPR) firm's due diligence review resulted in approximately 9.3% 'C' and 'D' graded loans. For 49 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, as further described in the Third-Party Due Diligence section beginning on page 6. In addition, timelines were extended on 339 loans that 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' rated class.
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 class is repaid in full. Losses are allocated in reverse-sequential order. Furthermore, the provision to re-allocate principal to pay interest on the 'AAAsf' rated notes prior to other principal distributions is highly supportive of timely interest payments to that class, in the absence of servicer advancing.
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 October 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 October 2017. If FirstKey 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 268 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, we believe that FirstKey's oversight for completion of these activities serves as a strong mitigant of potential delays. In addition, the obligation of FirstKey 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 October 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 13%.
Deferred Amounts (Negative): Non-interest-bearing principal forbearance amounts totalling $36.57 million (5.63% of the unpaid principal balance) are outstanding on 804 loans. Fitch included the deferred amounts when calculating the borrower's loan-to-values (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 (that is, 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) 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 61.07% of the unpaid principal balance, which approximates Fitch's 'Bsf' LS expectation.
Solid Alignment of Interest (Positive): A majority-owned affiliate of FirstKey will acquire and retain a 5% eligible vertical interest in each class of the securities to be issued.
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 37.1% at 'AAA'. 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 'Towd Point Mortgage Trust 2016-4', available at 'www. fitchratings. com' or by clicking on the link.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by WestCor Land Title Insurance Company (WestCor), Clayton Holdings LLC, and American Mortgage Consultants (AMC)/JCIII & Associates, Inc. (JCIII). The third-party due diligence described in Form 15E focused on: regulatory compliance, pay history, servicing comments, the presence of key documents in the loan file and data integrity. In addition, Westcor and AMC 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 completed on 100% of the pool. A pay history review was conducted on 100% of the pool, and a servicing comment review was completed on the loans which have experienced a delinquency in the past 12 months.
Fitch considered this information in its analysis and based on the findings, Fitch made minor adjustments to its analysis:
Fitch made an adjustment on 49 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% LS for loans in the states that fall under Freddie Mac's do not purchase list of 'high cost' or 'high risk'. Three loans were affected by this approach.
For the remaining 46 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, we assume 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 339 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.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under Related Research below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated May 2016.