DBRS Finalizes Provisional Rating on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2018-3

DBRS, Inc. (DBRS) finalized its provisional rating on the following Asset-Backed Security, Series 2018-3 (the Certificate) issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2018-3 (the Trust):

-- $75.5 million Class M at B (low) (sf)

The B (low) (sf) rating on the Certificate reflects 4.50% 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 11,716 loans with a total principal balance of $2,323,775,975 as of the Cut-Off Date (June 30, 2018).

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 (August 15, 2018).

The portfolio contains 100% modified loans. 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, 5,470 mortgages have forborne principal amounts as a result of modification, which equates to 12.7% of the total unpaid principal balance as of the Cut-Off Date. For 95.7% of the modified loans, the modifications happened more than two years ago. The loans are approximately 137 months seasoned, and all are current as of the Cut-Off Date. Furthermore, 87.4% 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. None of the loans are subject to the Consumer Financial Protection Bureau’s Qualified Mortgage rules.

The mortgage loans will be serviced by Specialized Portfolio Servicing, Inc. 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 Class HT, Class HA, Class HB, Class HV, Class HZ, Class MT, Class MA, Class MB, Class MV, Class MZ, Class M55D, Class M55E and Class M55I Certificates). Wilmington Trust, National Association (Wilmington Trust) will serve as the 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 and Transfer 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 R&Ws. The warranty period will only be effective through August 13, 2021 (approximately three years from the Closing Date), for substantially all R&Ws other than the real estate mortgage investment conduit R&W.

The mortgage loans will be divided into three loan groups: Group H, Group M and Group M55. The Group H loans (29.9% of the pool) were subject to step-rate modifications. Group M loans (65.9% of the pool) and Group M55 loans (4.2% of the pool) were subject to either fixed-rate modifications or step-rate modifications that reached their final step dates as of May 31, 2018, 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 5.5% or has forbearance. Each Group M55 loan has a mortgage interest rate greater than 5.5% and has no forbearance. Principal and interest (P&I) on the 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, non-guaranteed, interest-only mortgage insurance and residual Certificates) will be cross-collateralized among the three 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.

The rating reflects transactional strengths that include underlying assets that have generally performed well through the crisis (87.4% 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.

This transaction employs a relatively weak R&W framework that includes a 36-month sunset 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, certain principal proceeds can be used to pay interest to the rated Certificate, and subordination levels are greater than expected losses, which may provide for interest payments to the rated Certificate.

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, 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.