DBRS Finalizes Provisional Ratings on Flagstar Mortgage Trust 2018-3INV

DBRS, Inc. (DBRS) finalized the following provisional ratings on the Mortgage Pass-Through Certificates, Series 2018-3INV (the Certificates) issued by Flagstar Mortgage Trust 2018-3INV (FSMT 2018-3INV):

-- $287.9 million Class A-1 at AAA (sf)
-- $287.9 million Class A-2 at AAA (sf)
-- $279.7 million Class A-3 at AAA (sf)
-- $279.7 million Class A-4 at AAA (sf)
-- $209.8 million Class A-5 at AAA (sf)
-- $209.8 million Class A-6 at AAA (sf)
-- $69.9 million Class A-7 at AAA (sf)
-- $69.9 million Class A-8 at AAA (sf)
-- $8.2 million Class A-9 at AAA (sf)
-- $8.2 million Class A-10 at AAA (sf)
-- $287.9 million Class A-X-1 at AAA (sf)
-- $287.9 million Class A-X-2 at AAA (sf)
-- $279.7 million Class A-X-3 at AAA (sf)
-- $209.8 million Class A-X-4 at AAA (sf)
-- $69.9 million Class A-X-5 at AAA (sf)
-- $8.2 million Class A-X-6 at AAA (sf)
-- $287.9 million Class RR-A at AAA (sf)

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

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

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

The AAA (sf) ratings on the Certificates reflect the 12.50% of credit enhancement 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 prime, first-lien, fixed-rate, agency, investment- property residential mortgages. The Certificates are backed by 1,077 loans with a total principal balance of $329,047,681 as of the Cut-Off Date (May 1, 2018).

Flagstar Bank, FSB is the Originator and Servicer of the mortgage loans and the sponsor of the transaction. Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS) will act as the Master Servicer, Securities Administrator, Certificate Registrar and Custodian. Wilmington Trust National Association (rated A (high) with a Stable trend by DBRS) will serve as Trustee. Inglet Blair, LLC will act as the Representation and Warranty (R&W) Reviewer.

The pool comprises 100% fully amortizing fixed-rate conventional mortgages with original terms to maturity of primarily 30 years. The loans are conforming mortgages made to investors for business or commercial purposes. Consequently, none of the loans in the pool are subject to the Qualified Mortgage and Ability-to-Repay rules. In addition, 49 borrowers have multiple mortgages (116 loans in total) included in the securitized portfolio.

In its analysis, DBRS assigned a 1.8 times penalty to defaults for the investor mortgages, additional penalties to borrowers with multiple loans in the pool and a downward adjustment to recovery values, which resulted in higher loss expectations.

All the mortgage loans in the portfolio were eligible for purchase by Fannie Mae or Freddie Mac. DBRS conducted extensive analysis on the Fannie Mae and Freddie Mac historical datasets dating back to 1999. In addition, further analysis was performed on the agency-conforming investor loans with FICO and loan to-value profiles similar to the loans included in the FSMT 2018-3INV pool. Performance on agency loans has generally outperformed its non-agency counterparts.

The transaction employs a senior-subordinate, shifting-interest cash flow structure that is enhanced from a pre-crisis structure.

Unique to the FSMT shelf, the servicing fee payable to the Servicer comprises three separate components: the base servicing fee, the aggregate delinquent servicing fee and the aggregate incentive servicing fee. These fees vary based on the delinquency status of the related loan and will be paid from interest collections before distribution to the securities. The base servicing fee will reduce the Net Weighted-Average Coupon (WAC) payable to certificateholders as part of the aggregate expense calculation. However, except for the Class B-6-C Net WAC, the delinquent and incentive servicing fees will not be included in the reduction of Net WAC and will thus reduce available funds entitled to the certificateholders. To capture the impact of such potential fees, DBRS ran additional cash flow stresses based on its 60+-day delinquency and default curves, as detailed in the Cash Flow Analysis section of the report.

The ratings reflect transactional strengths that include high-quality underlying assets, well-qualified borrowers and extensive performance history.

The transaction exhibits certain challenges such as limited third-party due diligence, an R&W framework that contains materiality factors, an unrated R&W provider, knowledge qualifiers and sunset provisions that allow for certain R&Ws to expire within three to six years after the Closing Date. The framework is perceived by DBRS to be limiting compared with traditional lifetime R&W standards in certain DBRS-rated securitizations. To capture the perceived weaknesses, DBRS reduced the originator score 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 strengths, challenges and mitigating factors are detailed in the related 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, Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules, 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 in connection with this rating action.

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.