Fitch Reviews GSE Credit Risk Transfer Transactions
Fitch affirmed the ratings for 57 of the classes reviewed (21 original classes, 36 exchangeable classes), upgraded 10 classes (four original, six exchangeable), and placed 13 classes on Rating Watch Positive (seven original, six exchangeable). A spreadsheet detailing Fitch's rating actions can be found at 'www.fitchratings.com' by performing a title search for 'U.S. RMBS GSE CRT Rating Actions for Oct. 7, 2015'.
KEY RATING DRIVERS
The transactions under review include seven Fannie Mae Connecticut Avenue Securities (CAS) transactions, nine Freddie Mac Structured Agency Credit Risk (STACR) transactions and one JP Morgan Madison Avenue transaction. Payments on the notes are subject to the credit and principal payment risk of reference pools of certain residential mortgage loans held in various guaranteed MBS. The CAS and STACR notes are general unsecured obligations of Fannie Mae and Freddie Mac, respectively.
The upgrades reflect improvements in the relationship of credit enhancement (CE) to expected pool loss since issuance. All of the classes positively affected by the rating changes are M-1 classes and all of the rating changes are a single rating notch (from 'BBB-sf' to 'BBBsf', for example). For M-1 classes included in this review, CE as a percentage of the remaining mortgage pool balance has increased between eight and 133 basis points (bps) since issuance, with an average increase of 50 bps.
The classes placed on Rating Watch Positive have also experienced an improved CE to loss ratio but do not yet meet Fitch's upgrade thresholds. Fitch will monitor the performance of these classes and resolve their ratings within the next six months.
Due to the sequential payment allocation of principal among the subordinate classes, the M-1 classes have received a significant amount of principal since issuance despite the relatively limited seasoning. In high investment grade rating analysis projections, Fitch assumes low-probability and high stress scenarios that are likely to prevent the subordinate principal allocation tests from being satisfied, resulting in extended projected remaining lives for most rated classes. To the extent the stressed scenarios do not occur and the rated classes continue to pay down, the sequential payment priority is likely to increase positive rating pressure over time.
Additional positive rating pressure is likely to develop over time as the transactions' remaining time until legal maturity shortens. Fitch generally adjusts its loss expectations to account for the reduced loss exposure window.
The reference mortgage pools have performed well to date, with no pool reporting more than 14 bps of serious (60+ days) delinquency as of the most recent remittance report. Property values in the reference pools have benefitted from home price appreciation since issuance. Weighted average combined loan-to-value (CLTV) ratios have improved by up to 8% for the more seasoned transactions.
Fitch's mortgage loss projections generally decreased modestly since issuance due to shorter time frames until legal maturity, and improved CLTV ratios. In the base-case scenario, Fitch expects the reference pools to incur on average 31 bps of loss before legal maturity.
Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.
The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.
Additionally, because of the counterparty dependence on Fannie Mae and Freddie Mac, Fitch's rating on the notes could be affected by the Issuer Default Rating (IDR) of the GSEs if the IDR were to fall below the credit rating implied by the relationship of CE to expected reference mortgage pool loss.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.