DBRS Assigns Provisional Ratings to Connecticut Avenue Securities, Series 2014-C03

DBRS has today assigned the following provisional ratings to the Connecticut Avenue Securities, Series 2014-C03 (CAS 2014-C03) notes issued by Fannie Mae (the Notes):

-- $555.0 million Class 1M-1 at BBB (high) (sf)
-- $239.5 million Class 2M-1 at BBB (low) (sf)

The BBB (high) (sf) rating on Class 1M-1 in this transaction reflects the 2.00% of credit enhancement provided by subordination in Group 1. The BBB (low) (sf) on Class 2M-1 rating reflects 2.40% of credit enhancement in Group 2. Other than the specified classes above, DBRS does not rate any other classes in this transaction.

The Notes represent unsecured general obligations of Fannie Mae, the Issuer. The Notes are subject to the credit and principal payment risk of a certain reference pool (the Reference Pool) of residential mortgages held in various Fannie Mae-guaranteed mortgage-backed securities. Cash flow from the Reference Pools will not be used to make any payment to the CAS 2014-C03 noteholders; instead, Fannie Mae will be responsible for making monthly interest payments at the note rate, and periodic principal payments on the Notes in accordance with the actual principal payments it collects from the Reference Pools. Furthermore, losses to the CAS 2014-C03 Notes are not tied to the actual cumulative losses on the Reference Pool. Rather, they are calculated based on the occurrence of credit events (generally defined as delinquency of 180+ days, short sale, deed-in-lieu, sale of mortgage during the foreclosure process and real-estate-owned) and a pre-determined set of loss severities within each loan group.

The reference pool is divided into two separate loan groups: The Group 1 Reference Pool contains 246,445 mortgages with original loan-to-value (LTV) ratios greater than 60% and less than or equal to 80%, and the Group 2 Reference Pool contains 85,810 mortgages with original LTV greater than 80% and lower than or equal to 97%.

The originators for the Group 1 Reference Pool are Wells Fargo Bank, N.A. (Wells Fargo, 24.8%), JPMorgan Chase Bank, N.A. (JPMCB, 8.4%), and various other originators, each comprising less than 5% of the Group 1 Reference Pool. The originators for the Group 2 Reference Pool are Wells Fargo (26.3%), JPMCB (5.9%), and various other originators, each comprising less than 5% of the Group 2 Reference Pool.

The loans in the Group 1 Reference Pool will be serviced by Wells Fargo (24.8%), JPMCB (8.4%) and various other servicers, each comprising less than 5% of the Group 1 Reference Pool. The loans in the Group 2 Reference Pool will be serviced by Wells Fargo (26.3%), JPMCB (7.4%) and various other servicers, each comprising less than 5% of Group 2 Reference Pool. Wells Fargo will act as the Global Agent. Fannie Mae will act as the Master Servicer.

DBRS notes the following strengths and challenges for this transaction:

Strengths
-- Seller (or Lender)/Servicer Approval Process and Quality Control Platform
-- Well-Diversified Reference Pool
-- Strong Structural Protections
-- Strong Alignment of Interest
-- Pre-Defined Loss Severity Schedule
-- Extensive Performance History

Challenges
-- High LTVs in Group 2 and Some Loans with 1x30 Delinquency History
-- Unsecured Obligation of Fannie Mae
-- Representation and Warranties Framework
-- Limited Third-Party Due Diligence

The above strengths, challenges and their mitigating factors are discussed in more detail in the related presale report.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, Third-Party Due Diligence Criteria for U.S. RMBS Transactions, Representations and Warranties Criteria for U.S. RMBS Transactions and Legal Criteria for U.S. Structured Finance Transactions, which can be found on our website under Methodologies.

These ratings are endorsed by DBRS Ratings Limited for use in the European Union.