DBRS Assigns Provisional Ratings to Structured Agency Credit Risk Debt Notes, Series 2017-DNA3

DBRS, Inc. (DBRS) assigned the following provisional ratings to the Structured Agency Credit Risk Debt Notes, Series 2017-DNA3 (STACR 2017-DNA3) notes (the Notes) issued by Freddie Mac (the Issuer):

-- $400.0 million Class M-1 at BBB (low) (sf)
-- $600.0 million Class M-2 at B (high) (sf)
-- $600.0 million Class M-2R at B (high) (sf)
-- $600.0 million Class M-2S at B (high) (sf)
-- $600.0 million Class M-2T at B (high) (sf)
-- $600.0 million Class M-2U at B (high) (sf)
-- $600.0 million Class M-2I at B (high) (sf)
-- $300.0 million Class M-2A at BB (sf)
-- $300.0 million Class M-2AR at BB (sf)
-- $300.0 million Class M-2AS at BB (sf)
-- $300.0 million Class M-2AT at BB (sf)
-- $300.0 million Class M-2AU at BB (sf)
-- $300.0 million Class M-2AI at BB (sf)
-- $300.0 million Class M-2B at B (high) (sf)
-- $300.0 million Class M-2BR at B (high) (sf)
-- $300.0 million Class M-2BS at B (high) (sf)
-- $300.0 million Class M-2BT at B (high) (sf)
-- $300.0 million Class M-2BU at B (high) (sf)
-- $300.0 million Class M-2BI at B (high) (sf)

Classes M-2, M-2R, M-2S, M-2T, M-2U, M-2I, M-2AR, M-2AS, M-2AT, M-2AU, M-2AI, M-2BR, M-2BS, M-2BT, M-2BU and M-2BI are Modifiable and Combinable STACR Notes (MAC Notes). The holders of Class M-2A and Class M-2B Notes can exchange all or part of such classes for the related classes of MAC Notes and vice versa. Classes M-2I, M-2AI and M-2BI are interest-only MAC Notes.

The BBB (low) (sf), BB (sf) and B (high) (sf) ratings reflect 2.500%, 1.750% and 1.000% 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 223,585 greater than 20-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 payments to the STACR 2017-DNA3 Noteholders; instead, Freddie Mac will be responsible for making monthly interest payments at the applicable note rate and periodic principal payments on the Notes based upon the actual principal payments it collects from the Reference Pool.

STACR 2017-DNA3 is the tenth transaction below 80% LTV in the STACR series where note write-downs are based on actual realized losses, not on a predetermined set of loss severities. The maturity date for actual loss STACR transactions has been extended to 12.5 years compared with a ten-year maturity in prior fixed severity STACR transactions.

Freddie Mac is obligated to retire the Notes by March 2030 by paying an amount equal to the remaining note principal balance, plus accrued and unpaid interest, and the fair value of any estimated subsequent recoveries as applicable and as determined by Freddie Mac. The Notes may also be redeemed on or after (1) the date on which the respective reference pool pays down to less than 10% of its cut-off date balance or (2) the payment date in September 2027, whichever comes first.

Freddie Mac has removed loans that were initially included in the Reference Pool that were located in one of the 82 counties that the Federal Emergency Management Agency (FEMA) designated as major disaster areas and in which FEMA has authorized individual assistance to homeowners as a result of Hurricane Harvey or Hurricane Irma as of September 13, 2017. After the Closing Date, Reference Obligations will be removed from the Reference Pool if the related mortgaged property is located within a county declared by FEMA at any time from and after September 14, 2017, and through and including November 2, 2017, to be a major disaster area and in which FEMA has authorized individual assistance to homeowners in such county as a result of Hurricane Harvey or Hurricane Irma.

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
-- 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 presale report.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are RMBS Insight 1.3: 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, Legal Criteria for U.S. Structured Finance, Operational Risk Assessment for U.S. RMBS Originators and Operational Risk Assessment for U.S. RMBS Servicers, which can be found on dbrs.com 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.