DBRS Morningstar Finalizes Provisional Rating on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2020-2

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the following Mortgage-Backed Security, Series 2020-2 issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2020-2 (the Trust):

-- $84.1 million Class M at B (low) (sf)

This transaction is a securitization of a portfolio of seasoned, reperforming first-lien residential mortgages funded by the issuance of the certificates, which are backed by 9,702 loans with a total principal balance of $1,572,659,156 as of the Cut-Off Date.

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.

The loans are approximately 157 months seasoned and most loans have been modified (97.5%). Each modified mortgage loan was modified under either government-sponsored enterprise (GSE) Home Affordable Modification Program (HAMP) or GSE non-HAMP modification programs. Within the pool, 3,018 mortgages have forborne principal amounts as a result of modification, which equates to 10.7% of the total unpaid principal balance as of the Cut-Off Date. For 80.2% of the modified loans, the modifications happened more than two years ago.

The loans are all current as of the Cut-Off Date. Furthermore, 84.7% and 33.8% of the mortgage loans have been zero times 30 days delinquent for at least the past 12 months and 24 months, respectively, under the Mortgage Bankers Association delinquency methods. DBRS Morningstar assumed that all loans within the pool are exempt from the Qualified Mortgage rules because of their eligibility to be purchased by Freddie Mac.

The mortgage loans will be serviced by Select Portfolio Servicing, Inc (the Servicer). The Servicer will not be advancing any delinquent principal or interest on any mortgages; however, the Servicer is obligated to advance to third parties any amounts necessary for the preservation of mortgaged properties or real estate owned properties that the Trust acquires 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 A-IO, Class HAU, Class HA, Class HA-IO, Class HBU, Class HB, Class HB-IO, Class HTU, Class HT, Class HT-IO, Class HV, Class HZ, Class MAU, Class MA, Class MA-IO, Class MBU, Class MB, Class MB-IO, Class MTU, Class MT, Class MT-IO, Class MV, Class MZ, Class M55D, Class M55E, Class M55G, Class M55H, and Class M55I; collectively, the Guaranteed Certificates). Wilmington Trust National Association (Wilmington Trust; rated AA (low) with a Stable trend by DBRS Morningstar) will serve as Trust Agent. Wells Fargo Bank, N.A. (rated AA with a Negative trend by DBRS Morningstar) will serve as the Custodian for the Trust. U.S. Bank National Association (rated AA (high) with a Negative trend by DBRS Morningstar) 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. Freddie Mac 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 July 13, 2023 (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 (5.7% of the pool) were subject to step-rate modifications and had not yet reached their final step rate as of April 30, 2020. 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 (83.8% of the pool) and Group M55 loans (10.5% of the pool) include loans never modified, and loans that 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 amount or may have forbearance amount and any mortgage interest rate. Each Group M55 loan has a mortgage interest rate greater than 5.5% and no forbearance amount. All groups have loans in forbearance related to the Coronavirus Disease (COVID-19) pandemic, but are all current as of the Cut-off-Date.

Principal and interest (P&I) on the Guaranteed Certificates will be guaranteed by Freddie Mac. The Guaranteed Certificates will be primarily backed by collateral from each group, respectively. The remaining Certificates, including the subordinate, nonguaranteed, 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 P&I payments that are guaranteed 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 in reverse sequential order.

CORONAVIRUS PANDEMIC IMPACT
The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many residential mortgage-backed security (RMBS) asset classes, some meaningfully.

Seasoned reperforming loans (RPL) is a traditional RMBS asset class that consists of securitizations backed by pools of seasoned performing and reperforming residential home loans. Although borrowers in these pools may have experienced delinquencies in the past, the loans have been largely performing for the past six months to 24 months since modification. Generally, these pools are highly seasoned and contain sizable concentrations of previously modified loans.

As a result of the coronavirus pandemic, DBRS Morningstar expects increased delinquencies, loans on forbearance plans, and a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: June Update,” published on June 1, 2020), for the RPL asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than it previously used. DBRS Morningstar derives such MVD assumptions through a fundamental home price approach based on the forecasted unemployment rates and GDP growth outlined in the moderate scenario. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the RPL asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans with previous delinquencies, recent modifications, or higher updated loan-to-value (LTV) ratios may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), signed into law on March 27, 2020, approximately 6.84% of the pool balance (approximately 8.76%, 6.98%, and 4.67% of Group H mortgage loans, Group M mortgage loans, and Group M55 mortgage loans, respectively, were in an active forbearance plan) are on coronavirus-related forbearance plans because the borrowers reported financial hardship; however, the loans are current as of the Cut-Off Date. These forbearance plans allow temporary payment relief, followed by repayment once the forbearance period ends. The Servicer is generally offering borrowers a three-month payment forbearance plan. Beginning in month four, the borrower can repay all the missed mortgage payments at once or opt to go on a repayment plan to catch up on missed payments for a maximum of six months to 12 months. During the repayment period, the borrower needs to make regular payments and additional amounts to catch up on the missed payments. Generally, the Servicer would attempt to contact the borrowers before the expiration of the forbearance period and evaluate the borrowers' capacity to repay the missed amounts. As a result, the Servicer, in adherence to the CARES Act, may offer a repayment plan or other forms of payment relief, such as deferrals of unpaid P&I amounts or a loan modification, in addition to pursuing other loss mitigation options.

For this transaction, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches due to the coronavirus pandemic, stemming from lower P&I collections. These assumptions include: (1) Increased delinquencies for the first 12 months and (2) a weighted-average coupon deterioration stress incorporated into the cash flow runs.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: June Update,” dated June 1, 2020.

The ratings reflect transactional strengths that include the following:

-- Current loans with relatively good payment histories;
-- Borrower LTV;
-- Satisfactory third-party due diligence review;
-- Strong servicer; and
-- Seasoning.

The transaction also includes the following challenges:

-- R&W standard; and
-- No servicer advances of delinquent P&I.

The full description of the strengths, challenges, and mitigating factors is detailed in the related rating report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (April 1, 2020), which can be found on dbrsmorningstar.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.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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