DBRS Morningstar Assigns Provisional Credit Ratings to Connecticut Avenue Securities, Series 2023-R07

DBRS, Inc. (DBRS Morningstar) assigned the following provisional credit ratings to the Connecticut Avenue Securities Notes, Series 2023-R07 (the Notes) to be issued by Connecticut Avenue Securities Trust 2023-R07 (CAS 2023-R07):

-- $246.0 million Class 2M-1 at A (low) (sf)
-- $184.5 million Class 2M-2 at BBB (sf)
-- $129.5 million Class 2B-1 at BB (sf)
-- $61.5 million Class 2M-2A at BBB (high) (sf)
-- $61.5 million Class 2M-2B at BBB (high) (sf)
-- $61.5 million Class 2M-2C at BBB (sf)
-- $64.7 million Class 2B-1A at BBB (low) (sf)
-- $64.7 million Class 2B-1B at BB (sf)
-- $61.5 million Class 2E-A1 at BBB (high) (sf)
-- $61.5 million Class 2A-I1 at BBB (high) (sf)
-- $61.5 million Class 2E-A2 at BBB (high) (sf)
-- $61.5 million Class 2A-I2 at BBB (high) (sf)
-- $61.5 million Class 2E-A3 at BBB (high) (sf)
-- $61.5 million Class 2A-I3 at BBB (high) (sf)
-- $61.5 million Class 2E-A4 at BBB (high) (sf)
-- $61.5 million Class 2A-I4 at BBB (high) (sf)
-- $61.5 million Class 2E-B1 at BBB (high) (sf)
-- $61.5 million Class 2B-I1 at BBB (high) (sf)
-- $61.5 million Class 2E-B2 at BBB (high) (sf)
-- $61.5 million Class 2B-I2 at BBB (high) (sf)
-- $61.5 million Class 2E-B3 at BBB (high) (sf)
-- $61.5 million Class 2B-I3 at BBB (high) (sf)
-- $61.5 million Class 2E-B4 at BBB (high) (sf)
-- $61.5 million Class 2B-I4 at BBB (high) (sf)
-- $61.5 million Class 2E-C1 at BBB (sf)
-- $61.5 million Class 2C-I1 at BBB (sf)
-- $61.5 million Class 2E-C2 at BBB (sf)
-- $61.5 million Class 2C-I2 at BBB (sf)
-- $61.5 million Class 2E-C3 at BBB (sf)
-- $61.5 million Class 2C-I3 at BBB (sf)
-- $61.5 million Class 2E-C4 at BBB (sf)
-- $61.5 million Class 2C-I4 at BBB (sf)
-- $123.0 million Class 2E-D1 at BBB (high) (sf)
-- $123.0 million Class 2E-D2 at BBB (high) (sf)
-- $123.0 million Class 2E-D3 at BBB (high) (sf)
-- $123.0 million Class 2E-D4 at BBB (high) (sf)
-- $123.0 million Class 2E-D5 at BBB (high) (sf)
-- $123.0 million Class 2E-F1 at BBB (sf)
-- $123.0 million Class 2E-F2 at BBB (sf)
-- $123.0 million Class 2E-F3 at BBB (sf)
-- $123.0 million Class 2E-F4 at BBB (sf)
-- $123.0 million Class 2E-F5 at BBB (sf)
-- $123.0 million Class 2-X1 at BBB (high) (sf)
-- $123.0 million Class 2-X2 at BBB (high) (sf)
-- $123.0 million Class 2-X3 at BBB (high) (sf)
-- $123.0 million Class 2-X4 at BBB (high) (sf)
-- $123.0 million Class 2-Y1 at BBB (sf)
-- $123.0 million Class 2-Y2 at BBB (sf)
-- $123.0 million Class 2-Y3 at BBB (sf)
-- $123.0 million Class 2-Y4 at BBB (sf)
-- $61.5 million Class 2-J1 at BBB (sf)
-- $61.5 million Class 2-J2 at BBB (sf)
-- $61.5 million Class 2-J3 at BBB (sf)
-- $61.5 million Class 2-J4 at BBB (sf)
-- $123.0 million Class 2-K1 at BBB (sf)
-- $123.0 million Class 2-K2 at BBB (sf)
-- $123.0 million Class 2-K3 at BBB (sf)
-- $123.0 million Class 2-K4 at BBB (sf)
-- $184.5 million Class 2M-2Y at BBB (sf)
-- $184.5 million Class 2M-2X at BBB (sf)
-- $129.5 million Class 2B-1Y at BB (sf)
-- $129.5 million Class 2B-1X at BB (sf)

The A (low) (sf), BBB (high) (sf), BBB (sf), BBB (low) (sf), and BB (sf) ratings reflect 3.500%, 3.000%, 2.750%, 2.125%, and 1.500% credit enhancement, respectively. Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

CAS 2023-R07 is the 58th 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 (MBS). As of the Cut-Off Date, the Reference Pool consists of 77,088 greater-than-20-year term, fully amortizing, first-lien, fixed-rate mortgage loans underwritten to a full documentation standard, with original loan-to-value (LTV) ratios greater than 80%. The mortgage loans were acquired by Fannie Mae between June 1, 2022 and December 31, 2022 and were securitized by Fannie Mae between June 1, 2022, and June 30, 2023.

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 amounts, 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; please see the Offering Memorandum (OM) for more details. 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 0.06% 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, as shown in the table below. Please see the OM for more details about the AW.

The calculation of principal payments to the Notes will be based on actual principal collected on the Reference Pool. 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. For CAS 2023-R07, the minimum credit enhancement test is set to pass at the Closing Date. This allows 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 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 September 2043, 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. Citibank, N.A. 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 7.0% of loans originated under the HomeReady® 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 transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary, “Baseline Macroeconomic Scenarios for Rated Sovereigns: September 2023 Update,” published September 28, 2023. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse Coronavirus Disease (COVID-19) pandemic scenarios, which were first published in April 2020.

The credit 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.

DBRS Morningstar’s credit rating on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Interest Payment Amount and Principal Payment Amount.

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 ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023; https://www.dbrsmorningstar.com/research/420108).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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

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

This is a solicited credit rating.

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

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

The credit 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 8, 2023), https://www.dbrsmorningstar.com/research/420333

-- 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 (August 31, 2023), https://www.dbrsmorningstar.com/research/420106

-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023), https://www.dbrsmorningstar.com/research/420107

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