DBRS Finalizes Provisional Ratings on Connecticut Avenue Securities, Series 2015-C04

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following Connecticut Avenue Securities, Series 2015-C04 (CAS 2015-C04) notes issued by Fannie Mae (the Notes):

-- $242.6 million Class 1M-1 at BBB (sf)
-- $155.3 million Class 2M-1 at BBB (low) (sf)

The BBB (sf) rating on the Class 1M-1 notes in this transaction reflects the 3.05% of credit enhancement provided by subordination in Group 1. The BBB (low) (sf) rating on Class 2M-1 notes reflects 3.10% of credit enhancement in Group 2. Other than the specified classes above, DBRS does not rate any other classes in this transaction.

The notes in the CAS 2015-C04 transaction 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.

The Reference Pool is divided into two separate loan groups: The Group 1 Reference Pool contains 121,498 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 83,164 mortgages with original LTV greater than 80% and less than or equal to 97%. The majority of the mortgages in the Group 2 Reference pool have active mortgage insurance (MI) provided by various mortgage companies. For this transaction, Fannie Mae guarantees the MI coverage amount to the extent that the company providing MI coverage goes into either bankruptcy or run-off mode. Both Reference Pools consist of 30-year, fully amortizing, first-lien, fixed-rate mortgages underwritten to a full documentation standard.

Cash flow from the Reference Pools will not be used to make any payment to the CAS 2015-C04 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.

CAS 2015-C04 is the first transaction in the CAS series where note writedowns are based on actual realized losses and not on a predetermined set of loss severities. Furthermore, unlike prior CAS transactions where a credit event could occur as early as a mortgage’s being 180 or more days delinquent, for this transaction, a delinquent mortgage would typically need to go through the entire liquidation process for a credit event to occur. The maturity dates for this transaction have been extended to 12.5 years compared with a ten-year maturity in prior CAS transactions to allow for longer timelines necessary to liquidate the collateral.

The originators for the Group 1 Reference Pool are Wells Fargo Bank, N.A. (Wells Fargo, 11.8%), JPMorgan Chase Bank, N.A. (JPMCB, 5.4%) and various other originators, each comprising less than 5.0% of the Group 1 Reference Pool. The originators for the Group 2 Reference Pool are Wells Fargo (13.4%), JPMCB (7.0%) 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 (11.8%), JPMCB (5.4%) 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 (13.4%), JPMCB (7.0%) 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 alignment of interest
-- Strong structural protections
-- Extensive performance history

Challenges
-- High LTVs in Group 2 and some loans with 1 times 30 delinquency history
-- Unsecured obligation of Fannie Mae
-- Representation and warranties framework
-- Limited third-party due diligence
-- Borrower-paid MI termination/cancellation

The above strengths, challenges and their mitigating factors are discussed in more detail in the related rating 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, which can be found on our website under Methodologies.

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

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.