DBRS Assigns Provisional Ratings to J.P. Morgan Mortgage Trust 2016-3

DBRS, Inc. (DBRS) has today assigned the following provisional ratings to the Mortgage Pass-Through Certificates, Series 2016-3 (the Certificates) issued by J.P. Morgan Mortgage Trust 2016-3 (the Trust):

-- $235.5 million Class 1-A-1 at AAA (sf)
-- $235.5 million Class 1-A-2 at AAA (sf)
-- $176.6 million Class 1-A-3 at AAA (sf)
-- $176.6 million Class 1-A-4 at AAA (sf)
-- $58.9 million Class 1-A-5 at AAA (sf)
-- $58.9 million Class 1-A-6 at AAA (sf)
-- $46.4 million Class 1-A-7 at AAA (sf)
-- $46.4 million Class 1-A-8 at AAA (sf)
-- $12.4 million Class 1-A-9 at AAA (sf)
-- $12.4 million Class 1-A-10 at AAA (sf)
-- $235.5 million Class 1-AX-1 at AAA (sf)
-- $235.5 million Class 1-AX-2 at AAA (sf)
-- $176.6 million Class 1-AX-3 at AAA (sf)
-- $58.9 million Class 1-AX-4 at AAA (sf)
-- $46.4 million Class 1-AX-5 at AAA (sf)
-- $12.4 million Class 1-AX-6 at AAA (sf)
-- $17.1 million Class 1-A-M at AAA (sf)
-- $110.4 million Class 2-A-1 at AAA (sf)
-- $110.4 million Class 2-A-2 at AAA (sf)
-- $110.4 million Class 2-AX-1 at AAA (sf)
-- $110.4 million Class 2-AX-2 at AAA (sf)
-- $110.4 million Class 2-AX-3 at AAA (sf)
-- $8.0 million Class 2-A-M at AAA (sf)
-- $25.1 million Class A-M at AAA (sf)

Classes 1-AX-1, 1-AX-2, 1-AX-3, 1-AX-4, 1-AX-5, 1-AX-6, 2-AX-1, 2-AX-2 and 2-AX-3 are interest-only certificates. The class balances represent notional amounts.

Classes 1-A-1, 1-A-2, 1-A-3, 1-A-5, 1-A-6, 1-A-7, 1-A-9, 1-AX-2, 1-AX-4, 2-A-1, 2-AX-3 and A-M are exchangeable certificates. These classes can be exchanged for a combination of depositable certificates as specified in the offering documents.

Classes 1-A-1, 1-A-2, 1-A-3, 1-A-4, 1-A-5, 1-A-6, 1-A-7, 1-A-8, 1-A-9, 1-A-10, 2-A-1 and 2-A-2 are super-senior certificates. These classes benefit from additional protection from senior support certificates (Classes 1-A-M, 2-A-M and A-M) with respect to loss allocation.

The AAA (sf) ratings on the certificates reflect 6.15% of credit enhancement provided by subordination. Other than the specified classes above, DBRS does not rate any other classes in this transaction.

The Certificates are backed by 553 loans with a total principal balance of $395,349,365 as of the Cut-off Date (September 1, 2016). The loans are divided into two pools, Pool 1 and Pool 2. Both pools consist of fixed-rate, first-lien mortgage loans with original terms to maturity of 15 to 30 years.

The originators for the aggregate mortgage pool are First Republic Bank (First Republic, 41.6%), PHH Mortgage Corporation (PHH, 9.7%), Primary Capital Mortgage (Primary Capital, 6.5%), Opes Advisors, Inc. (5.6%), Bank of Oklahoma (BOKF, 5.4%) and various other originators, each comprising less than 5.0% of the mortgage loans.

The loans will be serviced or sub-serviced by First Republic (41.6%), PHH (9.7%), New Penn doing business as (d/b/a) Shellpoint Mortgage Servicing (8.0%), Primary Capital (6.5%), J.P. Morgan Chase, N.A. (5.7%), BOKF (5.4%) and various other servicers, each comprising less than 5.0% of the mortgage loans. Dovenmuehle Mortgage, Inc. is the sub-servicer for all the loans originated by Primary Capital (6.5%). Wells Fargo Bank, N.A. will act as the Master Servicer, Securities Administrator and Custodian. U.S. Bank Trust National Association will serve as Delaware Trustee. Pentalpha Surveillance LLC will serve as the Reviewer.

The transaction employs a senior-subordinate shifting-interest cash flow structure that is enhanced from a pre-crisis structure. Pool 1 and Pool 2 senior certificates will be backed by collateral from each pool, respectively. The subordinate certificates will be cross-collateralized between the two pools. This is generally known as Y-Structure. The ratings reflect transactional strengths that include high-quality underlying assets, well-qualified borrowers and a satisfactory third-party due diligence review.

Compared with other post-crisis representations and warranties frameworks, this transaction employs a relatively weak standard, which includes materiality factors, the use of knowledge qualifiers as well as sunset provisions that allow for certain representations to expire within three to six years after the closing date. The framework is perceived by DBRS to be weak and limiting compared with the traditional lifetime representations and warranties standard in other DBRS-rated securitizations. To capture the perceived weaknesses in the representations and warranties framework, DBRS reduced the originator scores in this pool. A lower originator score results in increased default and loss assumptions and provides additional cushions for the rated securities.

The full description of the representations and warranties framework, the mitigating factors and DBRS’s loss adjustments are detailed in the related 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, Unified Interest Rate Model for Rating U.S. Structured Finance Transactions, 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.

Please see the attached appendix for additional information regarding sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.