DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac STACR REMIC Trust 2021-DNA2

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Structured Agency Credit Risk (STACR) REMIC 2021-DNA2 Notes (the Notes) issued by Freddie Mac STACR REMIC Trust 2021-DNA2 (STACR 2021-DNA2):

-- $264.0 million Class M-1 at BBB (sf)
-- $198.0 million Class M-2A at BBB (low) (sf)
-- $198.0 million Class M-2B at BB (high) (sf)
-- $132.0 million Class B-1A at BB (sf)
-- $132.0 million Class B-1B at B (high) (sf)
-- $396.0 million Class M-2 at BB (high) (sf)
-- $396.0 million Class M-2R at BB (high) (sf)
-- $396.0 million Class M-2S at BB (high) (sf)
-- $396.0 million Class M-2T at BB (high) (sf)
-- $396.0 million Class M-2U at BB (high) (sf)
-- $396.0 million Class M-2I at BB (high) (sf)
-- $198.0 million Class M-2AR at BBB (low) (sf)
-- $198.0 million Class M-2AS at BBB (low) (sf)
-- $198.0 million Class M-2AT at BBB (low) (sf)
-- $198.0 million Class M-2AU at BBB (low) (sf)
-- $198.0 million Class M-2AI at BBB (low) (sf)
-- $198.0 million Class M-2BR at BB (high) (sf)
-- $198.0 million Class M-2BS at BB (high) (sf)
-- $198.0 million Class M-2BT at BB (high) (sf)
-- $198.0 million Class M-2BU at BB (high) (sf)
-- $198.0 million Class M-2BI at BB (high) (sf)
-- $198.0 million Class M-2RB at BB (high) (sf)
-- $198.0 million Class M-2SB at BB (high) (sf)
-- $198.0 million Class M-2TB at BB (high) (sf)
-- $198.0 million Class M-2UB at BB (high) (sf)
-- $264.0 million Class B-1 at B (high) (sf)
-- $132.0 million Class B-1AR at BB (sf)
-- $132.0 million Class B-1AI at BB (sf)

Classes M-2, M-2R, M-2S, M-2T, M-2U, M-2I, M-2AR, M-2AS, M-2AT, M-2AU, M-2AI, M-2BR, M-2BS, M-2BT, M-2BU, M-2BI, M-2RB, M-2SB, M-2TB, M-2UB, B-1, B-1AR, and B-1AI are Modifiable and Combinable STACR Notes (MAC Notes). Classes M-2I, M-2AI, M-2BI, and B-1AI are interest-only MAC Notes.

The BBB (sf), BBB (low) (sf), BB (high) (sf), BB (sf), and B (high) (sf) ratings reflect 2.000%, 1.625%, 1.250%, 1.000%, and 0.750% of credit enhancement, respectively. Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

STACR 2021-DNA2 is the 25th transaction in the STACR DNA series. The Notes are subject to the credit and principal payment risk of a certain reference pool (the Reference Pool) of residential mortgage loans held in various Freddie Mac-guaranteed mortgage-backed securities.

As of the Cut-Off Date, the Reference Pool consists of 172,929 greater-than-20-year fully amortizing first-lien fixed-rate mortgage loans underwritten to a full documentation standard, with original loan-to-value (LTV) ratios greater than 60% and less than or equal to 80%. The mortgage loans were estimated to be originated on or after September 2019 and were securitized by Freddie Mac between August 16, 2020, and September 30, 2020.

On the Closing Date, the trust will enter into a Collateral Administration Agreement (CAA) with Freddie Mac. Freddie Mac, as the credit protection buyer, will be required to make transfer amount payments. The trust is expected to use the aggregate proceeds realized from the sale of the Notes to purchase certain eligible investments to be held in a custodian account. The eligible investments are restricted to highly rated, short-term investments. Cash flow from the Reference Pool will not be used to make any payments; instead, a portion of the eligible investments held in the custodian account will be liquidated to make principal payments to the Noteholders and return amount, if any, to Freddie Mac upon the occurrence of certain specified credit events and modification events.

The coupon rates for the Notes are based on the Secured Overnight Financing Rate (SOFR). There are replacement provisions in place in the event that SOFR is no longer available. DBRS Morningstar did not run interest rate stresses for this transaction, as the interest is not linked to the performance of the reference obligations. Instead, the trust will use the net investment earnings on the eligible investments together with Freddie Mac’s transfer amount payments to pay interest to the Noteholders.

In this transaction, approximately 50.9% of the loans were originated using property values determined using Freddie Mac's automated collateral evaluation (ACE) assessment rather than a traditional full appraisal. Loans where the property values were determined using ACE assessments generally have better credit attributes.

The calculation of principal payments to the Notes will be based on actual principal collected on the Reference Pool. For STACR DNA transactions, beginning with the STACR 2018-DNA2 transaction, there has been a revision to principal allocation. The scheduled principal in prior transactions was allocated pro rata between the senior and nonsenior (mezzanine and subordinate) tranches, regardless of deal performance, while the unscheduled principal was allocated pro rata subject to certain performance tests being met. For the more recent transactions, the scheduled and unscheduled principal will be combined and only allocated pro rata between the senior and nonsenior tranches if the performance tests are satisfied. For the STACR 2021-DNA2 transaction, the minimum credit enhancement test—one of the three performance tests—has been set to fail at the Closing Date, thus locking out the rated classes from initially receiving any principal payments until the subordination percentage grows from 2.50% to 2.75%. Additionally, the nonsenior tranches will also be entitled to supplemental subordinate reduction amount if the offered reference tranche percentage increases above 5.50%. The interest payments for these transactions are not linked to the performance of the reference obligations except to the extent that modification losses have occurred.

STACR 2021-DNA2 is the first DNA transaction with a STACR REMIC structure with a 12.5 year deal term. The Notes will be scheduled to mature on the payment date in August 2033, but will be subject to mandatory redemption prior to the scheduled maturity date upon the termination of the CAA.

The sponsor of the transaction will be Freddie Mac. U.S. Bank National Association (rated AA (high) with a Negative trend and R-1 (high) with a Stable trend by DBRS Morningstar) will act as the Indenture Trustee, Exchange Administrator, and Custodian. Wilmington Trust, National Association (rated AA (low) with a Negative trend and R-1 (middle) with a Stable trend by DBRS Morningstar) will act as the Owner Trustee.

The Reference Pool consists of approximately 0.6% of loans originated under the Home Possible program. Home Possible is Freddie Mac’s affordable mortgage product designed to expand the availability of mortgage financing to creditworthy low- to moderate-income borrowers.

If a reference obligation is refinanced under the Enhanced Relief Refinance Program, then the resulting refinanced reference obligation may be included in the Reference Pool as a replacement of the original reference obligation. The Enhanced Relief Refinance Program provides refinance opportunities to borrowers with existing Freddie Mac mortgages who are current in their mortgage payments but whose LTV ratios exceed the maximum permitted for standard refinance products. The refinancing and replacement of a reference obligation under this program will not constitute a credit event.

For this transaction, if a loan becomes delinquent and the related servicer reports that such loan is in disaster forbearance before or in the reporting periods related to the payment dates in March 2021 as a result of Hurricane Laura or April 2021 as a result of Hurricane Sally, Freddie Mac will remove the loan from the pool to the extent the related mortgaged property is located in a Federal Emergency Management Agency (FEMA) major disaster area and in which FEMA had authorized individual assistance to homeowners in such area as a result of Hurricane Laura, Hurricane Sally, or any other hurricane that affects such related mortgaged property prior to the Closing Date.

The Coronavirus Disease (COVID-19) 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 securities asset classes, some meaningfully.

As a result of the coronavirus, 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 the moderate scenario in its commentary, see “Global Macroeconomic Scenarios: January 2021 Update,” published on January 28, 2021, for the government-sponsored enterprise (GSE CRT) 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 forecast unemployment rates and GDP growth outlined in the aforementioned 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 GSE CRT 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 layered risk (low FICO score with high LTV/high debt-to-income ratio) may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Additionally, higher delinquencies might cause a longer lockout period or a redirection of principal allocation away from outstanding rated classes because performance triggers failed.

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: January 2021 Update,” dated January 28, 2021.

The ratings reflect transactional strengths that include the following:
-- Seller (or lender)/servicer approval process and quality control platform.
-- Well-diversified reference pool.
-- High-quality credit and loan attributes.
-- Strong alignment of interest.
-- Extensive performance history.

The transaction also includes the following challenges:
-- Representation and warranties framework.
-- Limited third-party due diligence.
-- Counterparty exposure.

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

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

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 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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