Fitch Rates Mortgage Fund IVc Trust 2015-RN1
--\\$35,000,000 class A1 notes 'Asf'; Outlook Stable.
The rated class is collateralized with 2,427 peak-vintage seasoned re-performing loans (RPL) and non-performing loans (NPL) totaling approximately \\$372.8 million, including \\$21.7 million in non-interest-bearing deferred principal amounts. The 'Asf' rating on the class A1 notes reflect the 90.6% subordination provided by the 55% A2 notes and 35.6% in overcollateralization. The class A2 exchangeable notes and class A3 combination notes will not be rated by Fitch.
Fitch's rating on the class A1 notes reflect the credit attributes of the underlying collateral, sequential pay structure, the quality of the servicer Bayview Loan Servicing, LLC., due diligence review, loan documentation and recordation of assignments, and the representation (rep) and warranty framework. A rating cap of 'Asf' was applied due to the idiosyncratic and adverse-selection risks associated with NPL collateral. The 90.6% subordination significantly exceeds the amount of credit enhancement needed to support Fitch's 'Asf' rating.
KEY RATING DRIVERS
Distressed Collateral: The mortgage pool consists of 65% peak-vintage RPLs and 35% NPLs, defined as any loan that is 60 days or more delinquent. Fitch assumed 100% probability of default (PD) for all NPLs. Within the RPLs, 10% of the pool is 30-59 days delinquent and 34% that are current had been delinquent at least once during the past 24 months. Approximately 21% has been current for the past 24 months, and 78% of the pool has been modified. The 24-month payment histories were missing one or more months of payment status for the loans associated with 19% of the pool; for its analysis, Fitch assumed a delinquency occurred in these missing months.
Sequential Pay Structure: The transaction utilizes a sequential pay structure whereby the subordinate class does not receive principal until the senior class is repaid in full. Additionally, bond interest is paid from total available collections, which helps mitigate liquidity risk due to the uneven cash flow timing associated with NPLs. Interest payments will be made based on the lower of the fixed coupon rate of 3.00% and the available funds cap. Fitch's rating reflects an expectation that the A1 notes will not be affected by the available funds cap in the 'Asf' rating stress scenario and will receive interest payments at the fixed rate of 3.00%.
Servicing Quality: As part of its analysis, Fitch utilized its assessment of BLS. Fitch's review incorporated an onsite visit, review of loan files and servicing calls, as well as an analysis of BLS' strategy for servicing distressed loans. BLS' special servicing rating of 'RSS2+' reflects Fitch's positive view of the servicer's proficiency in servicing distressed loans.
Due Diligence Review and Results: JCIII & Associates, Inc. (JCIII) and AMC Diligence, LLC (AMC) performed due diligence reviews of the pool. JCIII's review included a review of regulatory compliance on 35% of the pool, 24 month pay history on 100% of the RPL loans, 12 month servicing comments on 67% of the pool, address verification on 15% of the pool, and data integrity on 21% of the pool. AMC performed a regulatory compliance review on 7% of the pool. In addition, ClearCapital.com Inc. (ClearCapital) performed a broker price opinion (BPO) reconciliation on approximately 19% of the pool.
Based on the diligence findings, Fitch made minor adjustments to its loss expectations to account for 117 loans graded a 'C' or 'D' due to material violations or lack of loan documentation to confirm compliance with either local, state and/or federal laws. The majority of these loans reflected violations where the statute of limitations had expired and therefore, are unlikely to invalidate the mortgage but may delay the foreclosure proceedings. Fitch extended its foreclosure timeline assumptions for these loans by six months. Additionally, there were 93 loans identified in the servicing comment review as having contested foreclosures or delays to foreclosure action. Fitch extended the foreclosure timeline assumptions by 12 months for these loans.
Tax and Title Search: Avenue 365 Lender Services (Avenue 365) performed an updated tax and title search on 100% of the loans in the pool. The title search included a review for any recorded homeowner association (HOA) lien and unpaid taxes. The title search identified 37 loans with recorded HOA liens in super lien states. Two loans are in states in which an HOA lien can eliminate the 1st lien mortgage; Bayview will satisfy these liens in full within 90 days from transaction close. To the extent the seller is actively working to cure the breach, the period will be extended to no more than an additional 30 days. The remaining 35 loans are in states in which an HOA lien can take superiority over the 1st lien mortgage up to a limited amount. For these loans, a reserve fund will be established and funded at closing with an amount equal to the aggregate HOA fees owed on these loans. Funds from this account will be used to satisfy the HOA lien on these loans when satisfaction of the HOA lien is required, while the class A1 notes are outstanding.
Avenue 365 found 229 loans had unpaid taxes totalling approximately \\$328,949. The seller will be responsible to pay or cause to be paid, all delinquent tax amounts within 90 days of the closing date. Any loan with unpaid taxes after the 90 day period will be repurchased by the seller. To the extent the seller is actively working to cure the breach, the period will be extended to no more than an additional 30 days.
Custodial Document Review: Fitch reviewed the custodial exception report and some exceptions were noted. There were 33 loans missing modification agreements. While a missing modification agreement is not likely to prevent foreclosure, it can potentially cause a delay in foreclosure action, and Fitch extended foreclosure timelines by three months for these loans.
In addition, there were 1,532 exceptions related to assignment, endorsement, mortgage note, security instrument or title policy exceptions. At the one year anniversary of the transaction closing date, the custodian will deliver an updated exception report to the indenture trustee. The indenture trustee will confirm whether there are any loans with the above mentioned exceptions. Any loan with uncured exceptions will be repurchased by the seller while the class A1 notes remain outstanding.
Assignment Recordation and Remediation: A review to confirm that all mortgages and subsequent assignments were recorded in the relevant local jurisdictions was performed. All mortgages and subsequent assignments were either recorded or were in the process of being recorded. The seller is obligated to repurchase any loan for which assignments are not recorded and endorsements are not completed by one year from the closing date while the class A1 notes remain outstanding.
The RPL mortgage assignments will be recorded in the name of the trust and the NPLs will be recorded in the name of the servicer, Bayview Loan Servicing, LLC (BLS), as contractual nominee for the issuer (subject to the lien of the Indenture Trustee). Fitch received a legal opinion stating beneficial interest in the underlying collateral will not be determined to be property of the servicer's estate in the event of a bankruptcy of the servicer. Fitch also believes that the risk of time delays caused by a bankruptcy filing of the servicer are accounted for in the liquidation timelines assumed in the rating analysis.
Representation and Warranty Framework: The reps provided are generally consistent with those outlined for seasoned and NPL collateral in Fitch's 'U.S. RMBS Master Rating Criteria'. However, the enforcement mechanisms do not provide for any proactive mechanisms or a responsible party for identifying breaches. Only upon discovery of a breach will a loan be subject to repurchase. For this reason, Fitch views the rep framework to be consistent with what it considers to be a Tier 4 framework. As a result, Fitch increased its loss expectations by over 4.50%.
The seller, Mortgage Fund IVc, LP, will be the rep provider until its term ends in approximately December 2020. After expiration of the fund, Bayview Asset Management, LLC will assume the responsibilities of the rep provider until the A-1 notes are paid in full.
No Servicer P&I Advances: The servicer will not be advancing delinquent monthly payments of principal and interest (P&I). Because 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 servicer is obligated to advance P&I. The lack of P&I advancing was accounted for in Fitch's cash flow analysis and the transaction's credit enhancement.
Vacant Properties: There are 126 properties identified as vacant, almost all of which are currently delinquent. Fitch reviewed inspection reports and servicing comments and determined many of these properties were in a state of significant disrepair or in need of improvements. For these reasons, Fitch applied a 100% loss on these loans which increased the mortgage pool expected loss by approximately 100 basis points.
Third-Party Loan Sale Provisions: The transaction permits sales of mortgage loans through third party loan sales, affiliate loan sales and sales to other securitization vehicles. The program manager, Bayview Fund Management LLC, is charged with the responsibility of arranging such sales. The sales of loans, which will be based on net asset values (NAVs) established for each loan at closing, will be permitted as long as certain provisions are met. Fitch's analysis confirmed that the permitted loan sales will not reduce the credit enhancement percentage of the rated class.
Excess Enhancement: The 90.6% subordination for the class A1 notes is significantly above the minimum credit enhancement needed to pass Fitch's 'Asf' stress. Credit enhancement for the rated class consists of overcollateralization provided by the residual interest certificates and subordination provided by the class A2 notes. Realized losses in the transaction will be applied to reduce the amount of overcollateralization from the residual interest certificates, and will not reduce the principal balance of the notes. Realized losses that exceed overcollateralization will result in undercollateralization and will be applied as implied writedowns to the notes in reverse sequential order.
In addition to its published rating criteria listed below, Fitch's analysis also incorporated a bespoke rating criteria applicable to transactions comprising more than 10% of NPLs, which Fitch expects to publish soon. The key rating drivers of the bespoke NPL criteria are provided below.
Loss Severity: Fitch's loss severity and recovery projections are driven primarily by updated property valuations and model projections for sustainable market value declines, quick sale adjustments and liquidation timelines. Due to the greater sensitivity to liquidation timeline assumptions for NPLs than for traditional RMBS, Fitch increases the stress scenario timeline assumptions and market value decline assumptions for NPL pools from the stress scenario assumptions used for traditional RMBS.
Lien Enforceability: Fitch expects third party reviews on NPL to ensure lien enforceability, including a 100% file review to confirm presence of necessary loan documentation, a 100% updated title review to ensure clear title and a 100% review of servicer files to identify pending litigation or other obstacles to foreclosure.
Servicer Quality: Fitch will expect a full operational review of the servicer indicating proficiency in servicing distressed loans. As part of the assessment, Fitch conducts an onsite visit, a review of loan files and listens to servicer phone calls. Fitch receives updated quarterly performance data for all rated servicers to monitor loss mitigation trends.
Servicer Pool-Specific Strategy: As part of the servicer assessment, Fitch considers the servicer strategy and a comparison of the servicer's loss severities and delinquency transition rates to the model development data set to assess the appropriateness of the assumptions used.
Structural Mitigants: Due to idiosyncratic and adverse-selection risk, Fitch will apply a rating cap of 'Asf' and look for the following mitigating structural features: a sequential pay structure, no equity leakage while the rated class is outstanding, principal collections available to pay interest, allowable interest deferrals, fixed bond coupons or an interest rate hedge when basis risk present and asset sales provisions that prevent a reduction in CE not anticipated by Fitch's analysis.
Cash Flow Timing: Fitch's NPL cash flow analysis assesses the timing of bond interest payments. The approach benchmarks the base-case assumption to industry average transition rates for NPL over the prior two years and then, in the stress scenario analysis, applies increasingly slower liquidation rates to the recovery timing assumption.
Probability of Default: Fitch assumes 100% probability of default for NPL assets.
There are four exceptions to Fitch's criteria in the analysis.
Fitch expects the most recent FICO for all loans to be aged no more than six months, and the most recent property valuation to be aged no more than 12 months. There were 280 loans for which the updated credit scores are older than six months or for which updated credit scores were not available. For 43 loans that have been current for the past 12 months, Fitch assumed a FICO score of 600. For 237 loans missing a FICO but delinquent in the past 12 months, Fitch believes the delinquency penalty applied to these loans adequately addresses the credit risk and used the original FICO scores provided. The majority of these loans are non-performing and were assumed to have a 100% default probability. Consequently, the FICO did not affect the default probability assumption for these loans.
There were 14 loans for which the most recent property value provided was older than 12 months or not obtained. This was mitigated by the property values provided being aged between just 13-15 months, or by the very low balance of the loan.
Fitch expects a third-party review (TPR) firm to confirm as part of the due diligence review, among other things, the current loan balance, including any deferred amounts that will be pledge to the trust. For the NPLs, JCIII's review confirmed only the interest bearing principal balance, not the deferred principal balance. However, the deferred principal portion only accounts for 2.8% of the aggregate principal balance of the NPL population and the results of the diligence indicated no material discrepancies in the non-deferred balances provided. Fitch included the reported deferred balances in its loss analysis.
The transaction permits sales of mortgage loans through third party loan sales, affiliate loan sales and sales to other securitization vehicles. The program manager, Bayview Fund Management LLC, is charged with responsibility of arranging such sales. An independent party will not be determining the sales price, which is an exception to Fitch's NPL bespoke criteria. However, Fitch assessed the loan sale provisions and found them to be satisfactory relative to the credit enhancement of the rated class.
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 3.9%. 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 from JCIII and AMC. The due diligence focused on regulatory compliance, pay history, servicing comments, and data integrity. In addition, Avenue 365 was retained to perform an updated title search.
Fitch considered the due diligence information in its analysis and, based on the findings, made minor adjustments to its analysis. The due diligence review resulted in 117 loans graded 'C' or 'D' due to material violations or lack of loan documentation to confirm compliance. The majority of these loans reflected violations where the statute of limitations had expired. While these issues may cause a delay in foreclosure proceedings, Fitch does not believe they will invalidate the mortgage. Fitch extended the foreclosure timeline assumptions for these loans by six months. Additionally, there were 93 loans identified in the servicing comment review as having contested foreclosures or delays to foreclosure action. Fitch extended the foreclosure timeline assumptions by 12 months for these loans. Finally, 33 loans were noted in the collateral exception report as having missing modification agreements. While a missing modification agreement is not likely to prevent foreclosure, it can potentially cause a delay in foreclosure action, and Fitch extended foreclosure timelines by three months for these loans.