DBRS Finalizes Provisional Ratings on Freddie Mac Seasoned Credit Risk Transfer Trust Series 2016-1

DBRS, Inc. (DBRS) has today finalized the following provisional ratings on the Asset-Backed Securities, Series 2016-1 (the Certificates) issued by Freddie Mac Seasoned Credit Risk Transfer Trust 2016-1 (the Trust):

-- $32.7 million Class M-1 at BBB (low) (sf)
-- $93.4 million Class M-2 at B (low) (sf)

The BBB (low) (sf) and B (low) (sf) ratings on the Certificates reflect 20.0% and 10.0% of credit enhancement, respectively, provided by subordinated Certificates in the pool.

Other than the specified classes above, DBRS does not rate any other classes in this transaction.

This transaction is a securitization of a portfolio of seasoned re-performing first-lien residential mortgages funded by the issuance of asset-backed Certificates (the Certificates). The Certificates are backed by approximately 4,064 loans with a total principal balance of $934,267,704 as of the Cut-Off Date.

The mortgage loans were either purchased by Freddie Mac from securitized Freddie Mac Participation Certificates or retained by Freddie Mac in whole loan form since their acquisition. The loans were held in Freddie Mac’s retained portfolio and deposited into the Trust as of the Closing Date.

The portfolio contains 100% modified loans. Historically, each loan experienced at least one credit event and was modified under either GSE HAMP or GSE non-HAMP modification programs. Within the pool, 3,847 mortgages have forborne principal amounts as a result of modification, which equates to 20.9% of the total principal balance as of the Cut-Off Date. For all but three loans (or 0.1% of the pool), the modifications happened more than two years ago. The loans are approximately 119 months seasoned and all are current as of the Cut-Off Date. All of the mortgage loans have been zero times 30 days delinquent (0 x 30) for at least the past 37 months under the Mortgage Bankers Association delinquency methods. None of the loans are subject to the Consumer Financial Protection Bureau’s Qualified Mortgage (QM) rules.

The mortgage loans will be serviced by Select Portfolio Servicing, Inc. (SPS). There will not be any advancing of delinquent principal or interest on any mortgages by the servicer; however, the servicer is obligated to advance to third parties any amounts necessary for the preservation of mortgaged properties or real estate owned (REO) properties acquired by the Trust through foreclosure or a loss mitigation process.

Freddie Mac will serve as the Sponsor and Trustee of the Trust. Wilmington Trust, National Association will serve as Trust Agent. Wells Fargo Bank, N.A. will serve as the Custodian for the Trust. U.S. Bank, National Association will serve as the Securities Administrator for the Trust and will act as paying agent, registrar, transfer agent and authenticating agent.

Freddie Mac will make certain representations and warranties (R&W) with respect to the mortgage loans. It will be the only party from which the Trust may seek indemnification (or, in certain cases, a repurchase) as a result of a breach of R&Ws as set forth in the Pooling Agreement. If a breach review trigger occurs, the Trust Agent, Wilmington Trust, will be responsible for the enforcement of R&Ws. The warranty period will only be extended through December 20, 2017 (approximately one year from the Closing Date), for substantially all R&Ws.

The mortgage loans will be divided into two loan groups. The Group M loans were subject to fixed-rate modifications and Group H loans were subject to step-rate modifications. Principal and interest (P&I) on the Group M and Group H senior certificates (the Guaranteed Certificates) will be guaranteed by Freddie Mac. The Guaranteed Certificates will be backed by collateral from each group respectively. The remaining Certificates, including the subordinate, interest-only (IO) and residual Certificates, will be cross-collateralized between the two groups. This is generally known as a Y-Structure.

The transaction employs a sequential-pay cash flow structure. Certain principal proceeds can be used to cover interest shortfalls on the rated Class M-1 and Class M-2 Certificates. Senior classes benefit from guaranteed P&I payments by the Guarantor Freddie Mac; however, such guaranteed amounts, if paid, will be reimbursed to Freddie Mac from the interest and principal collections prior to any allocation to the subordinate certificates. The senior principal distribution amounts vary subject to the satisfaction of a series of step-down tests. Realized losses are allocated reverse sequentially.

The ratings reflect transactional strengths that include underlying assets that have generally performed well through the crisis (0 x 30 days delinquencies in the past 37 months), good credit quality relative to other re-performing pools reviewed by DBRS, and a strong servicer. Additionally, a third-party due diligence review, albeit on less than 100% of the portfolio, was performed on a sample that generally meets or exceeds DBRS’s criteria. The due diligence results and findings on the sampled loans were satisfactory.

The transaction employs a considerably weaker R&W framework than other re-performing loan securitizations rated by DBRS. The SCRT 2016-1 framework includes a 12-month sunset without an R&W reserve account, substantial knowledge qualifiers and fewer mortgage loan representations relative to DBRS criteria for seasoned pools. DBRS increased loss expectations quite significantly (approximately 15% to 20%) from the model results to capture the weaknesses in the R&W framework. Other mitigating factors include (1) significant loan seasoning and very clean performance history in the past three years, (2) stringent and automatic breach review triggers, (3) Freddie Mac as the R&W provider and (4) satisfactory third-party due diligence review.

The lack of principal and interest advances on delinquent mortgages may increase the possibility of periodic interest shortfalls to the Noteholders; however, principal proceeds can be used to pay interest to the rated Certificates and subordination levels are greater than expected losses, which may provide for interest payments to the rated Certificates.

The DBRS ratings address the ultimate payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Certificates.

The full description of the strengths, challenges and mitigating factors are detailed in the related report. Please see the related appendix for additional information regarding sensitivity of assumptions used in the rating process.

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, Operational Risk Assessment for U.S. RMBS Originators, Operational Risk Assessment for U.S. RMBS Servicers 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.