Link to Fitch Ratings' Report: Structured Agency Credit Risk Debt Notes, Series 2013-DN2
Fitch Ratings expects to assign the following ratings and Rating Outlooks to
The 'BBB-sf' rating for the M-1 notes reflects the 1.95 percent subordination provided by the 1.65 percent class M-2 notes and the non-offered 0.30 percent B-H reference tranche. The notes are general unsecured obligations of
STACR 2013-DN2 is
The objective of the transaction is to transfer credit risk from
While the transaction structure simulates the behavior and credit risk of traditional RMBS mezzanine and subordinate securities,
KEY RATING DRIVERS
Home Price Growth Increasing Leverage: Fitch views the home price environment in which the properties in the reference pool were originated as overvalued with many of the MSAs experiencing high rates of home price appreciation without a commensurate rise in underlying economic fundamentals. In fact, a number of the locations continue to post elevated unemployment rates. The reference pool's weighted average sustainable loan-to-value (sLTV) ratio, which takes into account Fitch's home price view, is 86 percent - higher than the pool's weighted average original loan-to-value (OLTV) of 74 percent.
High Concentration of Refinances: The historically low interest rate environment in 2012 and early 2013 as well as recent home price growth has shifted the reference pool's composition towards non- purchase loans with rate and cash-out refinances comprising 53 percent and 20 percent of the reference pool. Because the values of the underlying properties are determined by an appraisal and not a true market clearing price as in a purchase transaction, these loans may be at greater default risk due to the potential for understated LTVs. This risk is accounted for in the higher default assumptions applied to these loans in Fitch's analysis of the pool.
Solid Lender Review and Acquisition Processes: Based on its review of
Few Findings in Third-Party Diligence: While only 1,000 loans in the reference pool were selected for review by a third-party diligence provider, the results indicated limited findings or were deemed as nonmaterial by Fitch. While a handful of loans had appraisal variances outside the typical tolerance of 10 percent as seen in private-label (PL) RMBS, the overall results are reflective of
Eminent Domain Risk Mitigated: The STACR Series 2013-DN2 transaction includes a provision that protects investors against eminent domain risk. Loans will be removed from the reference pool if they are seized pursuant to any special eminent domain proceeding brought by any federal, state or local government.
Fixed Loss Severity: The transaction's fixed loss severity schedule tied to cumulative net credit events is a positive feature as it reduces uncertainty that may be driven by future changes in
Advantageous Payment Priority: The payment priority of the M-1 class will result in a shorter life and more stable credit enhancement than mezzanine classes in PL RMBS, providing a relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full pro rata share of the pool's unscheduled principal payment until year 10, the M-1 class can receive a full pro rata share of unscheduled principal immediately as long as a minimum credit enhancement level is maintained and the net cumulative credit event is within a certain threshold. Additionally, unlike PL mezzanine classes, which lose subordination over time due to scheduled principal payments to more junior classes, the M-2 and B- H classes will not receive any scheduled or unscheduled allocations until the M-1 is paid in full. The B-H class will not receive any scheduled or unscheduled principal allocations until the M-2 is paid in full.
10-Year Hard Bullet Maturity: The M-1 and M-2 notes benefit from a 10-year legal final maturity. As a result, any collateral losses on the reference pool that occur beyond year 10 are borne by
Rep and Warranty Sunsets: All of the loans were acquired by
Seller Insolvency Risk Present: While the loan defect risk for 2013-DN2 is notably lower than for agency and non-agency mortgage pools securitized prior to 2009, Fitch believes the risk is greater for this transaction than for recently issued U.S. PL RMBS. Notably,
Solid Alignment of Interests: While the transaction is designed to transfer credit risk to private investors, Fitch believes the transaction benefits from solid alignment of interests.
Special Hazard Leakage: Fitch believes the structure is vulnerable to special hazard risk as there is no consideration for payment disruptions related to natural disaster events in the "credit event" definition. As such, credit protection in the transaction may be eroded by natural disasters that may cause extended delinquencies (that may in part be allowed by disaster relief programs) but where borrowers ultimately cure. Fitch considered this risk in its analysis, conducted sensitivity analysis and found, based on prior observed performance in post-natural disaster events including Hurricane Katrina and the Northridge earthquake, the risk exposure is relatively low.
Receivership Risk Considered: Under the Federal Housing Finance Regulatory Reform Act, the FHFA must place
Fitch's analysis incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at the MSA level. The implied rating sensitivities are only an indication of some of the potential outcomes and do not consider other risk factors that the transaction may become exposed to or be considered in the surveillance of the transaction. Two sets of sensitivity analyses were conducted at the state and national level to assess the effect of higher MVDs for the subject pool.
Roughly 25 percent of the pool is located in
Rating Sensitivity: Additional Decline in sMVD at the National Level
This set of sensitivity analysis demonstrates how the rating would react to steeper MVDs at the national level. The analysis assumes MVDs of 5 percent, 10 percent and 15 percent in addition to the model-projected 29.8 percent for this pool. The analysis indicates a rating impact with a further 5 percent MVD from the current model projection with further rating migration for the additional 10 percent and 15 percent MVD assumptions.
Key Rating Drivers and Rating Sensitivities are further detailed in Fitch's accompanying presale report, available at 'fitchratings.com' or by clicking on the above link.
Additional information is available at 'fitchratings.com'.
--'U.S. RMBS Mortgage Loan Loss Model Criteria' (August 2013);
--'U.S. RMBS Originator Review and Third-Party Due Diligence Criteria' (April 2013);
--'U.S. RMBS Cash Flow Analysis Criteria' (April 2013);
--'U.S. RMBS Representations and Warranties Criteria' (June 2013);
--'U.S. RMBS Rating Criteria' (
--'Global Structured Finance Rating Criteria'(
--'Global Rating Criteria for Single- and Multi-Name Credit- Linked Notes' (February 2013).
-- Structured Agency Credit Risk Debt Notes, Series 2013-DN2 Representations and Warranties Presale Appendix' (
U.S. RMBS Cash Flow Analysis Criteria
U.S. RMBS Originator Review and Third-Party Due Diligence Criteria
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes
Global Structured Finance Rating Criteria
U.S. RMBS Rating Criteria
U.S. RMBS Representations and Warranties Criteria
U.S. RMBS Loan Loss Model Criteria
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