DBRS Morningstar Assigns Ratings to 10 Freddie Mac Structured Agency Credit Risk Transactions

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following 10 Freddie Mac Structured Agency Credit Risk (STACR) transactions:

-- STACR 2017-DNA2
-- STACR 2017-HQA3
-- STACR 2017-HRP1
-- STACR 2018-HQA1
-- STACR 2018-DNA2
-- STACR 2018-HRP1
-- STACR 2018-HQA2
-- STACR 2018-HRP2
-- STACR 2019-HRP1
-- STACR 2019-DNA3

The above-referenced securities are currently also rated by DBRS, Inc.’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these securities Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about March 31, 2020. In accordance with MCR’s engagement letter covering these securities, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at https://ratingagency.morningstar.com/mcr.

These 10 STACR transactions are generally classified as government sponsored enterprise (GSE) CRT transactions.

DBRS Morningstar performed the following rating analysis on the transactions:

-- Loan-level default probability, loss severity, and expected loss review;
-- Cash flow analysis to evaluate the form and sufficiency of available credit enhancement;
-- Historical performance analysis as reflected in delinquencies, cumulative losses, and constant prepayment rates (CPRs);
-- Third-party due diligence sample size review; and
-- Representations and warranties (R&W) framework review.

POOL EXPECTED LOSSES
DBRS Morningstar used its proprietary RMBS Insight 1.3 model to derive probability of defaults, loss severities, and expected losses for each of the transactions. DBRS Morningstar recalculated or remapped certain collateral attributes in its analysis. The size of the reference pools for the transactions are large and geographically diverse, which generally suggests a low level of concentration and asset correlation. In its analysis, DBRS Morningstar floored the asset correlation in accordance with its published principal methodology. The probability of defaults, loss severities, and expected losses for each transaction are generally stepped up from the raw model results.

CASH FLOW ANALYSIS
A structural analysis that encompassed 12 cash flow stress scenarios was performed, which focused on prepayment speeds, timing of losses, and interest rate stresses.

OPERATIONAL RISK REVIEW
DBRS Morningstar conducted an aggregator review to assess Freddie Mac’s seller and servicer approval and oversight procedures. As a result, DBRS Morningstar believes that the company maintains a comprehensive credit risk management approach to effectively oversee the performance of its portfolio, which includes robust lender approval practices and strong ongoing monitoring programs.

HISTORICAL PERFORMANCE
DBRS Morningstar reviewed the historical performance of each transaction, as reflected in delinquencies, cumulative losses, and CPRs. Overall delinquencies benefitted from robust industry underwriting practices, a strong employment and economic backdrop, and rising home prices.

THIRD-PARTY DUE DILIGENCE
DBRS Morningstar reviewed the sample size for each of the due diligence review categories, including credit, regulatory compliance, valuation, and data integrity. The sample sizes in the transactions, except for transactions STACR 2017-DNA2 and STACR 2017-HQA3, do not meet DBRS Morningstar’s due diligence criteria threshold. Some mitigating factors for the lower due diligence sample include the following: (1) lender oversight and post-purchase quality control; (2) Freddie Mac retains risk in various parts of the capital structure, so it is incentivized to enforce R&W made by the lenders; and (3) Freddie Mac has a good record of successfully enforcing repurchases. DBRS Morningstar did not review the loan-level due diligence findings for each of the transactions; rather, it relied on the analysis done by MCR at the time of assigning ratings to the transactions on or prior to the closing dates, as well as the satisfactory performance of the transactions to date.

R&W FRAMEWORK
The R&W framework for STACR transactions is unique. Each lender makes loan-level R&W to Freddie Mac when it sells loans to Freddie Mac, and such R&W will not be passed through to the holder of the STACR notes. Instead, Freddie Mac is responsible for enforcing breach of R&W made by the lenders on the loans in the reference pool, which may result in the removal of the loans from the reference pool and subsequent payments to noteholders.

OTHER REVIEWS
DBRS Morningstar notes that a legal analysis, which included but was not limited to legal opinions and various transaction documents, was performed by MCR as part of its process of assigning ratings to each transaction on or prior to their closing dates. For the purpose of assigning ratings to the transactions, DBRS Morningstar did not perform additional document reviews unless otherwise indicated in this press release.

SUMMARY
The ratings are a result of DBRS Morningstar’s application of the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” published in December 2019 unless otherwise indicated in this press release.

DBRS Morningstar’s ratings address the timely 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 ratings for the STACR classes are being initiated by DBRS Morningstar as part of the announced analytical integration of certain U.S. RMBS asset classes (see the November 22, 2019, press release “DBRS and Morningstar Credit Ratings Confirm GSE CRT and MI-Linked Notes Asset Class Coverage”). As such, the ratings are deemed to be solicited DBRS Morningstar ratings.

The ratings assigned to certain securities may differ from the ratings implied by the quantitative model, but no such difference constitutes a material deviation. When assigning the ratings, DBRS Morningstar takes into account the rating analysis detailed in this press release and may have made qualitative adjustments for the analytical considerations not fully captured by the quantitative model.

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

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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