DBRS Finalizes Provisional Ratings on Structured Agency Credit Risk Debt Notes, Series 2016-HQA4

DBRS, Inc. (DBRS) has today finalized the following provisional ratings on the Structured Agency Credit Risk Debt Notes, Series 2016-HQA4 (STACR 2016-HQA4 or the Notes) issued by Freddie Mac (the Issuer):

-- $125.0 million Class M-1 at A (low) (sf)
-- $125.0 million Class M-2 at BBB (low) (sf)
-- $125.0 million Class M-2F at BBB (low) (sf)
-- $125.0 million Class M-2I at BBB (low) (sf)
-- $105.0 million Class M-3A at B (sf)
-- $105.0 million Class M-3AF at B (sf)
-- $105.0 million Class M-3AI at B (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 and Class 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 (low) (sf) and B (sf) ratings reflect 4.275%, 3.050% and 2.025% 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 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 60,173 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 80% and less than or equal to 97%. The majority of the mortgages in the Reference Pool have active mortgage insurance (MI) provided by various mortgage companies. For this transaction, any amount that Freddie Mac reports as being payable under any effective MI policy will be included in the net liquidation proceeds irrespective of Freddie Mac’s receipt of such amounts from the related MI company. 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-HQA4 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-HQA4 is the sixth above-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 dates for this transaction have been extended to 12.5 years compared with a 10.0-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, 15.6%), U.S. Bank, N.A. (U.S. Bank, 7.1%), Quicken Loans, Inc. (Quicken, 5.2%) 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 (15.6%), U.S. Bank (8.6%), Quicken (5.2%) 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 and
-- Extensive performance history.

Challenges:
-- High LTVs in Reference Pool,
-- Borrower-Paid Mortgage Insurance termination or cancellation,
-- Unsecured obligation of Freddie Mac,
-- Representation and warranties framework and
-- Limited third-party due diligence.

These 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.

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 to the right under Related Research 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.