DBRS Morningstar Finalizes Its Provisional Ratings on Connecticut Avenue Securities Trust 2021-R01

DBRS, Inc. (DBRS Morningstar) finalized the following provisional ratings on the Connecticut Avenue Securities (CAS), Series 2021-R01 Notes (the Notes) issued by Connecticut Avenue Securities Trust 2021-R01 (CAS 2021-R01):

-- $274.7 million Class 1M-1 at BBB (high) (sf)
-- $80.1 million Class 1M-2A at BBB (sf)
-- $80.1 million Class 1M-2B at BBB (sf)
-- $80.1 million Class 1M-2C at BBB (sf)
-- $240.4 million Class 1M-2 at BBB (sf)
-- $188.9 million Class 1B-1A at BB (high) (sf)
-- $188.9 million Class 1B-1B at BB (sf)
-- $377.8 million Class 1B-1 at BB (sf)
-- $80.1 million Class 1E-A1 at BBB (sf)
-- $80.1 million Class 1A-I1 at BBB (sf)
-- $80.1 million Class 1E-A2 at BBB (sf)
-- $80.1 million Class 1A-I2 at BBB (sf)
-- $80.1 million Class 1E-A3 at BBB (sf)
-- $80.1 million Class 1A-I3 at BBB (sf)
-- $80.1 million Class 1E-A4 at BBB (sf)
-- $80.1 million Class 1A-I4 at BBB (sf)
-- $80.1 million Class 1E-B1 at BBB (sf)
-- $80.1 million Class 1B-I1 at BBB (sf)
-- $80.1 million Class 1E-B2 at BBB (sf)
-- $80.1 million Class 1B-I2 at BBB (sf)
-- $80.1 million Class 1E-B3 at BBB (sf)
-- $80.1 million Class 1B-I3 at BBB (sf)
-- $80.1 million Class 1E-B4 at BBB (sf)
-- $80.1 million Class 1B-I4 at BBB (sf)
-- $80.1 million Class 1E-C1 at BBB (sf)
-- $80.1 million Class 1C-I1 at BBB (sf)
-- $80.1 million Class 1E-C2 at BBB (sf)
-- $80.1 million Class 1C-I2 at BBB (sf)
-- $80.1 million Class 1E-C3 at BBB (sf)
-- $80.1 million Class 1C-I3 at BBB (sf)
-- $80.1 million Class 1E-C4 at BBB (sf)
-- $80.1 million Class 1C-I4 at BBB (sf)
-- $160.3 million Class 1E-D1 at BBB (sf)
-- $160.3 million Class 1E-D2 at BBB (sf)
-- $160.3 million Class 1E-D3 at BBB (sf)
-- $160.3 million Class 1E-D4 at BBB (sf)
-- $160.3 million Class 1E-D5 at BBB (sf)
-- $160.3 million Class 1E-F1 at BBB (sf)
-- $160.3 million Class 1E-F2 at BBB (sf)
-- $160.3 million Class 1E-F3 at BBB (sf)
-- $160.3 million Class 1E-F4 at BBB (sf)
-- $160.3 million Class 1E-F5 at BBB (sf)
-- $160.3 million Class 1-X1 at BBB (sf)
-- $160.3 million Class 1-X2 at BBB (sf)
-- $160.3 million Class 1-X3 at BBB (sf)
-- $160.3 million Class 1-X4 at BBB (sf)
-- $160.3 million Class 1-Y1 at BBB (sf)
-- $160.3 million Class 1-Y2 at BBB (sf)
-- $160.3 million Class 1-Y3 at BBB (sf)
-- $160.3 million Class 1-Y4 at BBB (sf)
-- $80.1 million Class 1-J1 at BBB (sf)
-- $80.1 million Class 1-J2 at BBB (sf)
-- $80.1 million Class 1-J3 at BBB (sf)
-- $80.1 million Class 1-J4 at BBB (sf)
-- $160.3 million Class 1-K1 at BBB (sf)
-- $160.3 million Class 1-K2 at BBB (sf)
-- $160.3 million Class 1-K3 at BBB (sf)
-- $160.3 million Class 1-K4 at BBB (sf)
-- $240.4 million Class 1M-2Y at BBB (sf)
-- $240.4 million Class 1M-2X at BBB (sf)
-- $377.8 million Class 1B-1Y at BB (sf)
-- $377.8 million Class 1B-1X at BB (sf)

Classes 1M-2, 1A-I1, 1A-I2, 1A-I3, 1A-I4, 1E-A1, 1E-A2, 1E-A3, 1E-A4, 1B-I1, 1B-I2, 1B-I3, 1B-I4, 1E-B1, 1E-B2, 1E-B3, 1E-B4, 1C-I1, 1C-I2, 1C-I3, 1C-I4, 1E-C1, 1E-C2, 1E-C3, 1E-C4, 1E-D1, 1E-D2, 1E-D3, 1E-D4, 1E-D5, 1E-F1, 1E-F2, 1E-F3, 1E-F4, 1E-F5, 1-J1, 1-J2, 1-J3, 1-J4, 1-K1, 1-K2, 1-K3, 1-K4, 1-X1, 1-X2, 1-X3, 1-X4, 1-Y1, 1-Y2, 1-Y3, 1-Y4, 1M-2Y, 1M-2X, 1B-1, 1B-1Y, and 1B-1X are Related Combinable and Recombinable Notes (RCR Notes). Classes 1A-I1, 1A-I2, 1A-I3, 1A-I4, 1B-I1, 1B-I2, 1B-I3, 1B-I4, 1C-I1, 1C-I2, 1C-I3, 1C-I4, 1-X1, 1-X2, 1-X3, 1-X4, 1-Y1, 1-Y2, 1-Y3, 1-Y4, 1M-2X, and 1B-1X are interest-only RCR Notes.

The BBB (high) (sf), BBB (sf), BB (high) (sf), and BB (sf) ratings reflect 1.600%, 1.250%, 0.975%, and 0.700% of credit enhancement, respectively. Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

CAS 2021-R01 is the 40th benchmark transaction in the CAS 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 Fannie Mae-guaranteed mortgage-backed securities.

As of the Cut-Off Date, the Reference Pool consists of 246,836 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 February 2020 and were securitized by Fannie Mae between October 1, 2020, and January 31, 2021.

On the Closing Date, the trust will enter into a Collateral Administration Agreement (CAA) with Fannie Mae. Fannie Mae, 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 securities 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 securities account will be liquidated to make principal payments to the Noteholders and return amount, if any, to Fannie Mae 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 Fannie Mae’s transfer amount payments to pay interest to the Noteholders.

In this transaction, approximately 43.56% of the loans were originated using property values determined by using Fannie Mae's Appraisal Waiver (AW) rather than a traditional full appraisal. Loans where the AW is offered generally have better credit attributes.

Notable Changes
This transaction incorporates the following notable changes:
1.Unlike prior CAS transactions, the minimum credit enhancement test—one of the two performance tests—is not set to fail at the Closing Date. This will allow rated nonsenior classes to receive principal payments from the first Payment Date.
2.Nonsenior rated tranches will now be locked out from receiving principal payments if any of the performance tests fail. In prior CAS transactions, nonsenior rated tranches were allocated scheduled principal even when the performance tests were not satisfied.
3.CAS 2021-R01 is the first CAS transaction where the coupon rates for the various notes are based on the SOFR, whereas the coupon rates for prior transactions were based on Libor.

The calculation of principal payments to the Notes will be based on actual principal collected on the Reference Pool. Starting with this 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. Starting with CAS 2021-R01 transaction, the scheduled and unscheduled principal will be combined and only be allocated pro rata between the senior and nonsenior tranches if the performance tests are satisfied.

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.

The Notes will be scheduled to mature on the payment date in October 2041 but will be subject to mandatory redemption prior to the scheduled maturity date upon the termination of the CAA.

The administrator and trustor of the transaction will be Fannie Mae. Wells Fargo Bank, N.A. (rated AA with a Negative trend and R-1 (high) with a Negative trend by DBRS Morningstar) will act as the Indenture Trustee, Exchange Administrator, Custodian and Investment Agent. 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 Delaware Trustee.

The Reference Pool consists of approximately 1.1% of loans originated under the Home Ready program. HomeReady is Fannie Mae’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 High LTV Refinance Program, then the resulting refinanced reference obligation may be included in the Reference Pool as a replacement of the original reference obligation. The High LTV Refinance Program provides refinance opportunities to borrowers with existing Fannie Mae 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.

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 forbearance, 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 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.

For more information regarding the economic stress assumed under its baseline scenario, please see the following DBRS Morningstar commentary: “Baseline Macroeconomic Scenarios For Rated Sovereigns,” dated September 8, 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:
-- High LTV Loans.
-- 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.

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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