DBRS Assigns Provisional Ratings to Structured Agency Credit Risk Debt Notes, Series 2016-DNA3

DBRS, Inc. (DBRS) has today assigned the following provisional ratings to the Structured Agency Credit Risk Debt Notes, Series 2016-DNA3 (STACR 2016-DNA3) notes (the Notes) issued by Freddie Mac (the Issuer):

-- $190.0 million Class M-1 at A (low) (sf)
-- $180.5 million Class M-2 at BBB (sf)
-- $180.5 million Class M-2F at BBB (sf)
-- $180.5 million Class M-2I at BBB (sf)
-- $190.0 million Class M-3A at BB (sf)
-- $190.0 million Class M-3AF at BB (sf)
-- $190.0 million Class M-3AI at BB (sf)

Classes M-2F, M-2I, M-3AF and M-3AI are Modifiable and Combinable STACR Notes (MAC Notes). Holders of the Class M-2 or M-3A notes can exchange all or part of such classes for the related classes of MAC Notes and vice versa. Classes M-2I and M-3AI are interest-only MAC Notes.

The A (low) (sf), BBB (sf) and BB (sf) ratings reflect 4.00%, 3.05% and 2.05% of credit enhancement, respectively. Other than the specified classes above, DBRS does not rate any other classes in this transaction.

The Notes represent unsecured general obligations of Freddie Mac, the Issuer. The Notes are subject to the credit and principal payment risk of a certain reference pool (the Reference Pool) of residential mortgage loans held in various Freddie Mac-guaranteed mortgage-backed securities.

The Reference Pool consists of 114,903 30-year fully amortizing first-lien fixed-rate mortgage loans underwritten to a full documentation standard with original loan to-value (LTV) ratios greater than 60% and less than or equal to 80%. Payments to the Notes will be determined by the credit performance of the Reference Pool.

Cash flow from the Reference Pool will not be used to make any payment to the STACR 2016-DNA3 noteholders; instead, Freddie Mac 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 Pool.

STACR 2016-DNA3 is the sixth below 80% LTV transaction in the STACR series where note writedowns are based on actual realized losses and not on a predetermined set of loss severities. The maturity date for this transaction have been extended to 12.5 years compared with a ten-year maturity in prior STACR transactions with a predetermined set of loss severities.

The originators for the Reference Pool are Wells Fargo Bank, N.A. (Wells Fargo, 12.2%), US Bank, N.A. (US Bank, 6.1%), Quicken Loan, Inc. (Quicken Loan, 5.1%) and various other originators, each comprising less than 5.0% of the Reference Pool.

The loans in the Reference Pool will be serviced by Wells Fargo (12.2%), US Bank (6.1%), Quicken Loan (5.1%) and various other servicers, each comprising less than 5.0% of the Reference Pool. U.S. Bank National Association will act as the Global Agent. Freddie Mac 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:
-- Unsecured obligation of Freddie Mac
-- 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, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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