DBRS Morningstar Assigns Provisional Ratings to Freddie Mac STACR REMIC Trust 2021-DNA5

DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Structured Agency Credit Risk (STACR) REMIC 2021-DNA5 Notes (the Notes) to be issued by Freddie Mac STACR REMIC Trust 2021-DNA5 (STACR 2021-DNA5):

-- $169.0 million Class M-1 at BBB (high) (sf)
-- $169.5 million Class M-2A at BBB (sf)
-- $169.5 million Class M-2B at BBB (low) (sf)
-- $169.5 million Class B-1A at BB (high) (sf)
-- $169.5 million Class B-1B at BB (sf)
-- $339.0 million Class M-2 at BBB (low) (sf)
-- $339.0 million Class M-2R at BBB (low) (sf)
-- $339.0 million Class M-2S at BBB (low) (sf)
-- $339.0 million Class M-2T at BBB (low) (sf)
-- $339.0 million Class M-2U at BBB (low) (sf)
-- $339.0 million Class M-2I at BBB (low) (sf)
-- $169.5 million Class M-2AR at BBB (sf)
-- $169.5 million Class M-2AS at BBB (sf)
-- $169.5 million Class M-2AT at BBB (sf)
-- $169.5 million Class M-2AU at BBB (sf)
-- $169.5 million Class M-2AI at BBB (sf)
-- $169.5 million Class M-2BR at BBB (low) (sf)
-- $169.5 million Class M-2BS at BBB (low) (sf)
-- $169.5 million Class M-2BT at BBB (low) (sf)
-- $169.5 million Class M-2BU at BBB (low) (sf)
-- $169.5 million Class M-2BI at BBB (low) (sf)
-- $169.5 million Class M-2RB at BBB (low) (sf)
-- $169.5 million Class M-2SB at BBB (low) (sf)
-- $169.5 million Class M-2TB at BBB (low) (sf)
-- $169.5 million Class M-2UB at BBB (low) (sf)
-- $339.0 million Class B-1 at BB (sf)
-- $169.5 million Class B-1AR at BB (high) (sf)
-- $169.5 million Class B-1AI at BB (high) (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 (high) (sf), BBB (sf), BBB (low) (sf), BB (high) (sf), and BB (sf) ratings reflect 1.750%, 1.500%, 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-DNA5 is the 27th 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 230,280 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 April 2020 and were securitized by Freddie Mac between November 1, 2020, and December 31, 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 48.4% 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.

Unlike prior STACR transactions, the minimum credit enhancement test for STACR 2021-DNA5 is not set to fail at the Closing Date, allowing rated classes to receive principal payments from the First Payment Date, provided the other two performance tests—delinquency test and cumulative net loss test—are met. Additionally, the nonsenior tranches will also be entitled to a 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. This transaction is the first STACR transaction setting the Class B3H's coupon rate to be the SOFR benchmark rate without any spread. This may reduce the cushion that rated classes have to the extent any modification losses arise.

STACR 2021-DNA5 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 January 2034, but they 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 Stable trend and R-1 (high) with a Stable trend by DBRS Morningstar) will act as the Indenture Trustee and Exchange Administrator. 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 Bank of New York Mellon will act as the Custodian.

The Reference Pool consists of approximately 1.0% 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 LTVs 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.

The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures have caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the coronavirus, DBRS Morningstar saw an increase in the delinquencies for many residential mortgage-backed securities (RMBS) asset classes.

Such mortgage delinquencies were mostly in the form of forbearances, which are generally short-term periods of payment relief, that may perform differently from traditional delinquencies. At the onset of coronavirus, the option to forebear mortgage payments was widely available, driving forbearances to an elevated level. When the dust settled, loans with coronavirus-induced forbearance in 2020 performed better than expected, thanks to government aid, low LTVs, and acceptable underwriting in the mortgage market in general. Across nearly all RMBS asset classes in recent months, delinquencies have been gradually trending downward, as forbearance periods come to an end for many borrowers.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios - June 2021 Update,” published on June 18, 2021), DBRS Morningstar may assume higher loss expectations for pools with loans on forbearance plans.

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 2021 Update,” dated June 18, 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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