Fitch Rates Fannie Mae's Connecticut Ave Securities, Series 2015-C04
--$242,553,000 class 1M-1 notes 'BBB-sf'; Outlook Stable;
--$155,343,000 class 2M-1 notes 'BBB-sf'; Outlook Stable.
The following classes will not be rated by Fitch:
--$25,800,700,949 class 1A-H reference tranche;
--$12,766,436 class 1M-1H reference tranche;
--$651,064,000 class 1M-2 notes;
--$34,267,119 class 1M-2H reference tranche;
--$134,378,651 class 1B-H reference tranche;
--$17,442,057,505 class 2A-H reference tranche;
--$8,176,289 class 2M-1H reference tranche;
--$396,988,000 class 2M-2 notes;
--$20,894,628 class 2M-2H reference tranche;
--$145,350,479 class 2B-H reference tranche.
The 'BBB-sf' rating for the 1M-1 note reflects the 3.05% subordination provided by the 2.55% class 1M-2 note and the non-offered 0.50% 1B-H reference tranche. The 'BBB-sf' rating for the 2M-1 note reflects the 3.10% subordination provided by the 2.30% class 2M-2 note and the non-offered 0.80% 2B-H reference tranche. 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 be divided into two loan groups. Group 1 will consist of mortgage loans with loan-to-values (LTVs) greater than 60% and less than or equal to 80% while group 2 will consist of mortgage loans with LTVs greater than 80% and less than or equal to 97%. While each loan group has its own issued notes, each group's structure will be identical. There will be no cross-collateralization.
Connecticut Avenue Securities, series 2015-C04 (CAS 2015-C04) is Fannie Mae's ninth 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 $45.04 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 1M-1 and 2M-1 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 1M-1 and 2M-1 notes will be issued as uncapped LIBOR-based floaters and will carry a 12.5-year legal final maturity.
KEY RATING DRIVERS
Actual Loss Severities: This will be Fannie Mae's inaugural actual loss risk transfer transaction in which losses borne by the noteholders will not be based on a fixed loss severity (LS) schedule, as seen in the previous CAS transactions. The notes in this transaction will experience losses realized at the time of liquidation, which will include both lost principal and delinquent interest. For Group 1, Fitch's model LS for the 'BBB-sf' rating scenario is roughly the same as it would be if the fixed LS was applied, while for Group 2, Fitch's model LS at 'BBB-sf' is approximately 3.5% higher than if using the fixed LS schedule.
Mortgage Insurance Guaranteed by Fannie Mae: The majority of the loans in Group 2 are covered either by borrower-paid mortgage insurance (BPMI) or lender-paid MI (LPMI). Fannie Mae will be guaranteeing the 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%.
Seller Insolvency Risk Addressed: An enhancement was made with regard to insolvency risk. A loan will be removed from the reference pool if a lender has declared bankruptcy or has been put into receivership and, per the QC process, an eligibility defect is identified that could otherwise have resulted in a repurchase. In prior CAS deals, if a lender declared bankruptcy or was placed into receivership prior to a repurchase request made by Fannie Mae for a breach of a rep and warranty, the loan would not be removed from its related reference pool or treated as a credit event reversal if it became 180 days past due. This enhancement reduces the loss exposure arising from MI claim rescissions due to underwriting breaches by insolvent sellers.
12.5-Year Hard Maturity: The 1M-1, 1M-2, 2M-1 and 2M-2 notes benefit from a 12.5-year legal final maturity as opposed to the 10-year maturity for prior CAS deals. Thus, any credit events on the reference pool that occur beyond year 12.5 are borne by Fannie Mae and do not affect the transaction. In addition, credit events that occur prior to maturity with losses realized from liquidations that occur after the final maturity date will not be passed through to the noteholders. This feature more closely aligns the risk of loss to that of the 10-year, fixed LS CAS deals where losses were passed through at the time a credit event occurred - i.e. loans became 180 days delinquent with no consideration for liquidation timelines. Fitch accounted for the 12.5-year hard maturity in its default analysis and applied a reduction to its lifetime default expectations.
Advantageous Payment Priority: The payment priority of M-1 notes will result in a shorter life and more stable CE than mezzanine classes in private-label (PL) RMBS, providing a relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full pro-rata share of the pool's unscheduled principal payment until year 10, the M-1 notes can receive a full pro-rata share of unscheduled principal immediately, as long as a minimum CE level is maintained and the delinquency test is satisfied. Additionally, unlike PL mezzanine classes, which lose subordination over time due to scheduled principal payments to more junior classes, the M-2 and B-H classes in each group will not receive any scheduled or unscheduled allocations until their M-1 classes are paid in full. The B-H classes will not receive any scheduled or unscheduled principal allocations until the M-2 classes are paid in full.
Limited Size/Scope of Third-Party Diligence: Only 608 loans of those eligible to be included in the reference pool were selected for a full review (credit, property valuation and compliance) by a third-party due diligence provider. Of the 608 loans, 536 were part of this transaction's reference pool (315 in Group 1 and 221 in Group 2). The sample selection was limited to a population of 5,411 loans that were previously reviewed by Fannie Mae and met the reference pool's eligibility criteria. Furthermore, the third-party due diligence scope was limited to reflect Fannie Mae's post-close loan review for compliance. Fitch's review of Fannie Mae's risk management and quality control (QC) process/infrastructure, which has been significantly improved over the past several years, indicates a robust control environment that should minimize loan quality risk.
Solid Alignment of Interests: 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 A-H senior reference tranches, which have an initial loss protection of 4.00% in Group 1 and 4.00% in Group 2, as well as the first-loss B-H reference tranches, sized at 50 bps and 80 bps, respectively. Fannie Mae is also retaining an approximately 5% vertical slice/interest in the M-1 and M-2 tranches for Group 1 and 2, respectively.
Receivership Risk Considered: 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, which is reflected in its 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 M-1 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 MDVs of 10%, 20%, and 30%, in addition to the model-projected 23.6% at the 'BBB-sf' level% for Group 1 and 22.5% at the 'BBB-sf' level for Group 2. 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 10%, 7% and 28% would potentially reduce the Group 1 'BBB-sf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively. And additional MVDs of 10%, 7% and 29% would potentially reduce the Group 2 'BBB-sf' 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 our analysis.
The offering documents for CAS 2015-C04 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.