DBRS Finalizes Provisional Rating on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2017-4

DBRS, Inc. (DBRS) finalized its provisional rating on the Asset-Backed Security, Series 2017-4 (the Certificate) issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2017-4 (the Trust) as follows:

-- $46.3 million Class M at B (low) (sf)

The B (low) (sf) rating on the Certificate reflects 5.00% of credit enhancement provided by subordinated certificates in the pool.

Other than the specified class 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 the certificates, which are backed by 9,977 loans with a total principal balance of $1,852,436,659 as at the Cut-Off Date (October 31, 2017).

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 are currently held in Freddie Mac’s retained portfolio and will be deposited into the Trust on the Closing Date (December 13, 2017).

Modified loans comprise 100% of the portfolio. Each mortgage loan was modified under either a government-sponsored enterprise (GSE) Home Affordable Modification Program (HAMP) or a GSE non-HAMP modification program. Within the pool, 995 mortgages have forborne principal amounts as a result of modification, which equates to 4.1% of the total unpaid principal balance as of the Cut-Off Date. For 92.1% of the modified loans, the modifications happened more than two years ago. The loans are approximately 130 months seasoned, and all are current as of the Cut-Off Date. Furthermore, 86.6% of the mortgage loans have been zero times 30 days delinquent for at least the past 24 months under the Mortgage Bankers Association delinquency methods. Because of the seasoning of the collateral, none of the loans are subject to the Consumer Financial Protection Bureau’s Qualified Mortgage rules.

The mortgage loans will be serviced by Nationstar Mortgage LLC doing business as Mr. Cooper. 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 properties acquired by the Trust through foreclosure or a loss mitigation process.

Freddie Mac will serve as the Sponsor, Seller and Trustee of the transaction as well as Guarantor of the senior certificates (the Guaranteed Certificates; the Class HT, Class HA, Class HB, Class HV, Class HZ, Class MT, Class MA, Class MB, Class MV, Class MZ, Class M45T, Class M45F, Class M45D, Class M45S, Class M45C, Class M45I, Class M60T, Class M60F, Class M60S, Class M60C and Class M60I certificates). Wilmington Trust, N.A. (Wilmington Trust) will serve as Trust Agent. Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS) will serve as the Custodian for the Trust. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS) will serve as the Securities Administrator for the Trust and will act as Paying Agent, Registrar, Transfer Agent and Authenticating Agent.

Freddie Mac, as the Seller, will make certain representations and warranties (R&Ws) 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. If a breach review trigger occurs, the Trust Agent, Wilmington Trust, will be responsible for the enforcement of the R&Ws. The warranty period will only be effective through December 4, 2020 (approximately three years from the Closing Date), for substantially all R&Ws other than the real estate mortgage investment conduit R&Ws.

The mortgage loans will be divided into four loan groups. The Group H loans (40.2% of the pool) were subject to step-rate modifications. Group M loans (31.0% of the pool), Group M45 loans (21.4% of the pool) and Group M60 loans (7.4% of the pool) were subject to either fixed-rate modifications or step-rate modifications that have reached their final step dates and the borrowers have made at least one payment after such loans reached their final step dates as of the Cut-Off Date. Each Group M loan has a mortgage interest rate less than or equal to 4.5% or has forbearance. Each Group M60 loan has a mortgage interest rate greater than 5.5% and has no forbearance. Each Group M45 loan has a mortgage interest rate greater than 4.5% but less than or equal to 5.5% and has no forbearance. Principal and interest (P&I) on 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 non-guaranteed subordinate, interest-only, mortgage insurance and residual certificates, will be cross-collateralized among the four groups.

The transaction employs a pro rata pay cash flow structure with a sequential-pay feature among the subordinate certificates. Certain principal proceeds can be used to cover interest shortfalls on the rated Class M 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 P&I collections prior to any allocation to the subordinate certificates. The senior principal distribution amounts vary subject to the satisfaction of a step-down test. Realized losses are allocated reverse sequentially.

As a result of certain natural disasters (Hurricane Maria, the California wildfires and Hurricane Irma), Freddie Mac has removed (1) loans that were located in Puerto Rico or the U.S. Virgin Islands, (2) loans located in areas that the Federal Emergency Management Agency (FEMA) has designated as a major disaster area affected by the California wildfires and (3) loans located in FEMA-designated major disaster areas that have been on forbearance plans with the Servicer at the borrower’s request. Neither the Trustee, the Trust Agent nor the Servicer has made or will inspect the mortgaged properties in these affected areas. However, Freddie Mac provides a representation that properties have no damage/condemnation that materially adversely affects the value of the property and is expected to repurchase loans that breach this representation. As of the Cut-Off Date, approximately 10.4% of the properties securing the loans in the pool are located in zip codes identified by FEMA as having been affected by Hurricane Irma. DBRS ran additional scenario analyses to stress the FEMA loans and test that the rated bonds can withstand further property value declines.

The rating reflects transactional strengths that include underlying assets that have generally performed well through the crisis (86.6% of the pool has remained consistently current in the past 24 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 with respect to regulatory compliance and payment histories, was performed on a sample that exceeds DBRS’s criteria. The due diligence results and findings on the sampled loans were satisfactory.

Although improved from Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2016-1 (SCRT 2016-1), the transaction employs a relatively weak R&W framework that includes a 36-month sunset (as opposed to 12 months in SCRT 2016-1) without an R&W reserve account, substantial knowledge qualifiers (with clawback) and fewer mortgage loan representations relative to DBRS criteria for seasoned pools. DBRS increased loss expectations 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 two years, (2) stringent and automatic breach review triggers, (3) Freddie Mac as the R&W provider and (4) a satisfactory third-party due diligence review.

The lack of P&I 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 rating addresses 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 rating 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, 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 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.

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

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