DBRS Finalizes Provisional Rating on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2019-3

DBRS, Inc. (DBRS) finalized its provisional rating on the following Mortgage-Backed Security, Series 2019-3 (the Certificate) issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2019-3 (the Trust):

-- $73.0 million Class M at B (low) (sf)

The B (low) (sf) rating on the Certificate reflects 5.75% 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 13,018 loans with a total principal balance of $2,245,765,518 as of the Cut-Off Date (June 30, 2019).

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 14, 2019).

The loans are approximately 141 months seasoned and have all been modified. Each mortgage loan was modified under either Government-Sponsored Enterprise (GSE) Home Affordable Modification Program (HAMP) or GSE non-HAMP modification programs. Within the pool, 4,262 mortgages have forborne principal amounts as a result of modification, which equates to 10.5% of the total unpaid principal balance as of the Cut-Off Date. For 72.2% of the modified loans, the modifications happened more than two years ago.

The loans are all current as of the Cut-Off Date. Furthermore, 52.1% 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. There are 56 loans that are subject to the Consumer Financial Protection Bureau’s Qualified Mortgage (QM) rules and are designated as Temporary QM Safe Harbor, according to the third-party due diligence results. Additionally, there are 557 loans (4.3%) whose QM status is not available; DBRS assumed these loans to be non-QM.

The mortgage loans will be serviced by Specialized Loan Servicing LLC. 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 (Class HT, Class HA, Class HB, Class HV, Class HZ, Class MT, Class MA, Class MC, Class MD, Class IM, Class MB, Class MV, Class MZ, Class M55D, Class M55E, Class M55G and Class M55I Certificates). Wilmington Trust National Association (Wilmington Trust; rated A (high) with a Positive trend by DBRS) 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 also act as Paying Agent, Registrar, Transfer Agent and Authenticating Agent.

Freddie Mac, as the Seller, 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. If a breach review trigger occurs during the warranty period, the Trust Agent, Wilmington Trust, will be responsible for the enforcement of R&Ws. The warranty period will only be effective through August 12, 2022 (approximately three years from the Closing Date), for substantially all R&Ws other than the real estate mortgage investment conduit R&W, which will not expire.

The mortgage loans will be divided into three loan groups: Group H, Group M and Group M55. The Group H loans (4.9% of the pool) were subject to step-rate modifications and had not yet reached their final step-rate as of May 31, 2019. As of the Cut-Off Date, the borrower, while still current, has not made any payments accrued at such final step-rate. Group M loans (85.5% of the pool) and Group M55 loans (9.6% of the pool) were subject to either fixed-rate modifications or step-rate modifications that have reached their final step-rates, and as of the Cut-Off Date, the borrowers have made at least one payment after such mortgage loans reached their respective final step rates. Each Group M loan has a mortgage interest rate less than or equal to 5.5% and has no forbearance or may have forbearance and any mortgage interest rate. 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 among the senior group certificates 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 sequentially in reverse order.

The rating reflects transactional strengths that include underlying assets that have generally performed well through the crisis (all loans are current as of the Cut-Off Date, and the entire pool has remained consistently current for the past 12 months under the MBA method). 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 weak R&W framework that includes a 36-month sunset without an R&W reserve account, substantial knowledge qualifiers and fewer mortgage loan representations relative to DBRS’s criteria for seasoned pools. In addition, a breach review will only trigger if a loan had a foreclosure sale, short sale or deed in lieu of foreclosure sale completed or was charged off by the Servicer or has been modified by the Servicer (due to a hardship or by a court of competent jurisdiction). 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) Freddie Mac as the R&W provider and (3) 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 rating report.

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

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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