DBRS Morningstar Finalizes Provisional Ratings on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2023-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating on the following Mortgage-Backed Security, Series 2023-1 issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2023-1 (the Trust):

-- $10.6 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 the certificates, which are backed by 2,788 loans with a total principal balance of $470,690,243 as of the Cut-Off Date.

Freddie Mac either purchased the mortgage loans from securitized Freddie Mac Participation Certificates or Uniform Mortgage Backed Securities, or retained them 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 149 months seasoned, and approximately 92.7% have been modified. Each modified mortgage loan was modified under the Government-Sponsored Enterprise (GSE) Home Affordability Modification Program (HAMP), GSE non-HAMP modification program, and/or under or subject to a Freddie Mac payment deferral program (PDP). The remaining loans (7.3%) were never modified. Within the pool, 659 mortgages have forborne principal amounts as a result of modification, which equates to 4.8% of the total unpaid principal balance as of the Cut-Off Date. For 30.5% of the modified loans, the modifications happened more than two years ago.

92.2% of the loans have payment status as current as of the Cut-Off Date, of which 0.9% are in bankruptcy. Furthermore, 73.5% and 16.9% 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 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.

Specialized Loan Servicing LLC (56.1%), and NewRez LLC, d/b/a Shellpoint Mortgage Servicing (43.9%) will service the mortgage loans as of the closing date. There will not be any advancing of delinquent principal or interest on any mortgages by the Servicers; however, the Servicers are obligated to advance to third parties any amounts necessary for the preservation of mortgaged properties or real estate owned 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., the Class A-IO, MAU, MA, MA-IO, MB, MBU, MB-IO, MT, MT-IO, MTU, MV, MZ, TAU, TAW, TA, TA-IO, TBU, TBW, TB, TB-IO, TT, TT-IO, TTU, TTW, M5AU, M5AW, M55A, M5AI, M5BU, M5BW, M55B, M5BI, M55T, M5TI, M5TU, and M5TW Certificates). Wilmington Trust, National Association (Wilmington Trust) will serve as the Trust Agent. Computershare Trust Company, N.A. will serve as the Custodian for the Trust. U.S. Bank Trust Company, 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 August 7, 2026 (approximately three years from the Closing Date), for substantially all R&Ws other than the real estate mortgage investment conduit R&W and the R&W-related mortgage loans whose high-cost regulatory compliance was unable to be tested, which will not expire.

The mortgage loans will be divided into three loan groups: Group M, Group M55, and Group T. The Group M loans (81.1% of the pool) and Group M55 loans (8.2% 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% and has no forbearance. Group T loans (10.8% 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 related to a group of loans (M/M55/T) 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 and supported by 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 the related 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.

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

DBRS Morningstar’s credit rating on the Certificates addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the rated Certificates are the Interest Distribution Amount and the Class Principal Amount.

DBRS Morningstar’s credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, in this transaction, DBRS Morningstar's ratings do not address the payment of any Cap Carryovers based on its position in the cash flow waterfall.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the rating is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (March 3, 2023; https://www.dbrsmorningstar.com/research/410473).

Other methodologies referenced in this transaction are listed at the end of this press release. These may be found at: https://www.dbrsmorningstar.com/about/methodologies.

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (April 28, 2023),
https://www.dbrsmorningstar.com/research/413297
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://www.dbrsmorningstar.com/research/415687
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020),
https://www.dbrsmorningstar.com/research/366613
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023),
https://www.dbrsmorningstar.com/research/414076
-- Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008
-- Operational Risk Assessment for U.S. RMBS Originators (July 17, 2023),
https://www.dbrsmorningstar.com/research/417275
-- Operational Risk Assessment for U.S. RMBS Servicers (July 17, 2023),
https://www.dbrsmorningstar.com/research/417276

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