DBRS Morningstar Finalized Its Provisional Rating on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2021-3

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the following Mortgage-Backed Security, Series 2021-3 issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2021-3 (the Trust):

-- $18.6 million Class M at B (low) (sf)

DBRS Morningstar did not rate the other classes in the Trust.

This transaction is a securitization of a portfolio of seasoned reperforming first-lien residential mortgages funded by the issuance of mortgage-backed certificates (the Certificates). The Certificates are backed by 3,738 loans with a total principal balance of $564,029,506 as of the Cut-Off Date.

The mortgage loans were either purchased by Freddie Mac from securitized Freddie Mac Participation Certificates or Uniform Mortgage Backed Securities, 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 153 months seasoned, and approximately 85.6% have been modified. Each modified mortgage loan was modified under the Government-Sponsored Enterprise (GSE) Home Affordable Modification Program (HAMP), GSE non-HAMP modification program, or under or subject to a Freddie Mac payment deferral program (PDP). The remaining loans (14.4%) were never modified. Within the pool, 664 mortgages have forborne principal amounts as a result of modification, which equates to 5.4% of the total unpaid principal balance as of the Cut-Off Date. For 44.3% of the modified loans, the modifications happened more than two years ago.

The loans are all current as of the Cut-Off Date. Furthermore, 70.5% and 14.0% of the mortgage loans have been zero times 30 days delinquent (0 x 30) for at least the past 12 and 24 months, respectively, under the Mortgage Bankers Association (MBA) delinquency methods. DBRS Morningstar assumed all loans within the pool are exempt from the qualified mortgage rules because of their eligibility to be purchased by Freddie Mac.

NewRez LLC, d/b/a Shellpoint Mortgage Servicing (SMS), and Community Loan Servicing (CLS) will service the mortgage loans. There will not be any advancing of delinquent principal or interest on any mortgages by the Servicers; however, the servicer is obligated to advance to third parties any amounts necessary for the preservation of mortgaged properties or real estate owned (REO) 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 the Guarantor of the senior certificates (i.e., Class MAU, MAW, MA, MA-IO, MB, MBU, MBW, MB-IO, MT, MT-IO, MTU, MTW, MV, MZ, TAU, TAW, TAY, TA, TA-IO, TBU, TBW, TBY, TB, TB-IO, TT, TT-IO, TTU, TTW, TTY, M5AU, M5AW, M5AY, M55A, M5AI, M5BU, M5BW, M5BY, M55B, M5BI, M55T, M5TI, M5TU, M5TW, and M5TY certificates). Wilmington Trust, National Association (Wilmington Trust) will serve as the Trust Agent. Wells Fargo Bank, N.A. will serve as the Custodian for the Trust. U.S. Bank National Association will serve as the Securities Administrator for the Trust and will also initially act as the Paying Agent, Certificate 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 be effective only through October 13, 2024 (approximately three years from the Closing Date), for substantially all R&Ws other than the real estate mortgage investment conduit (REMIC) R&W and the R&W related mortgage loans whose high-cost regulatory compliance was unable to be tested, which will not expire.

Furthermore, on the Closing Date, as a result of Hurricane Ida, Freddie Mac, as Trustee, will direct the Servicers to inspect the mortgaged properties that are located in major disaster areas and where FEMA has authorized individual assistance through Closing. The Servicers will have 30 days from the closing date to complete such inspection or as soon as practicable. Within 10 days of receiving an inspection report from the Servicers, the Trustee, in its sole discretion, will determine whether the related mortgaged property was damaged and whether such damage (i) materially affects in an adverse manner the value of such mortgaged property as security for the related mortgage loan or the use for which the premises were intended or (ii) would render the entire mortgaged property uninhabitable. If, in the Trustee’s sole discretion, the mortgaged property is so damaged, the Seller will repurchase the related mortgage loan within 120 days. The costs and expenses associated with the completion of the inspections will be reimbursable to the Servicers as servicing advances.

The mortgage loans will be divided into three loan groups: Group M, Group M55, and Group T. The Group M loans (73.9% of the pool) and Group M55 loans (9.2% 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 higher than 5.5%. Group T loans (16.9% of the pool) were never modified or were subject to a PDP.

Principal and interest (P&I) on the senior certificates (the Guaranteed Certificates) will be guaranteed by Freddie Mac. The Guaranteed Certificates will be primarily backed by collateral from each group. The remaining certificates, including the subordinate, nonguaranteed interest-only (IO) 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 as described further in the Priority of Payments section of this report. Certain principal proceeds can be used to cover interest shortfalls on the rated Class M certificates. Senior classes, other than Class A-IO, 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 reverse sequentially.

In this transaction, in addition to the servicing fee, the trust agent fee, the securities administrator fee, the custodian fee, the independent reviewer fees, and the guarantor oversight fee, a supplemental guarantor oversight fee of 20 basis points will also be deducted from the Interest Remittance Amount before any distribution of interest payments to senior and subordinate certificates.

CORONAVIRUS DISEASE (COVID-19) PANDEMIC IMPACT
The Coronavirus Disease (COVID-19) pandemic and the resulting isolation measures caused an immediate economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. Shortly after the onset of the pandemic, DBRS Morningstar saw an increase in 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 very differently from traditional delinquencies. At the onset of the pandemic, 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 loan-to-value ratios, 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.

As of the Cut-Off Date, there are 20 loans that are subject to an active coronavirus-related forbearance plan with the Servicers.

For more information regarding the economic stress assumed under its baseline scenario, please see the DBRS Morningstar commentary Baseline Macroeconomic Scenarios For Rated Sovereigns, dated September 8, 2021.

The rating reflects transactional strengths that include the following:
-- Current loans with relatively good payment histories;
-- LTVs;
-- Satisfactory third-party due-diligence review;
-- 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 Presale 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/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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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