Fitch Assigns Ratings To Previously Unrated Fannie Mae CAS Notes

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following Ratings and Rating Outlooks to eight previously unrated notes from five Fannie Mae Connecticut Avenue Securities (CAS) transactions issued between 2013 and 2015:

--Fannie Mae Connecticut Avenue Securities, series 2013-C01 class M-2 notes 'BB+sf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2014-C01 class M-2 notes 'BBsf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2014-C02 class 1M-2 notes 'BBsf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2014-C02 class 2M-2 notes 'BB+sf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2014-C03 class 1M-2 notes 'B+sf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2014-C03 class 2M-2 notes 'BB+sf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2015-C01 class 1M-2 notes 'B+sf'; Outlook Stable;

--Fannie Mae Connecticut Avenue Securities, series 2015-C01 class 2M-2 notes 'BBsf'; Outlook Stable;

Fitch had previously only rated the M-1 classes in the five transactions. All of the M-1 classes have either paid in full or have had their ratings upgraded, reflecting strong performance to date. Fitch's reference mortgage pool loss assumptions for Fannie Mae CAS transactions were recently published as part of a periodic review of all Fitch rated GSE Credit Risk Transfer transactions. The report detailing Fitch's loss expectations can be found at 'www.fitchratings.com' by performing a title search for 'U.S. GSE Credit Risk Transfer Loss Projections' or by clicking the link below. The published report references loss expectations as of the June 2016 remittance period and may have minor differences from the August 2016 remittance period expected losses used in this rating analysis.

KEY RATING DRIVERS

Strong performance to date: All of the reference pools have performed well since issuance. None of the reference pools has experienced more than 20 basis points (bps) of pre-defined credit events with half of the deals experiencing credit events less than 10bps. Using the pre-determined loss severity schedule, none of the transactions have incurred 2bps or more of loss to date.

Build-up of Credit Enhancement: Since issuance, the M-2 classes have had a steady increase in their credit enhancement percentage, as the reference pool has paid down and losses have been minimal.

Solid Lender Review and Acquisition Processes: Based on its review of Fannie Mae's acquisition platform, Fitch believes that Fannie Mae has a well-established and disciplined credit-granting process in place and views its lender approval and oversight processes for minimizing counterparty risk and ensuring sound loan quality acquisitions as positive. Loan quality control (QC) review processes are thorough and indicate a tight control environment as is most evidenced by the very few findings noted by the third-party due diligence results. Tight controls lower operational risk and improve overall loan quality. The lower risk was accounted for by Fitch by applying a lower default estimate for the reference pool of 5%.

Legal Maturity Credit: All of the new ratings are assigned to transactions with a legal final maturity of 10 years. The hard maturity limits the timeframe in which losses can be realized. As the transactions season, and as the legal maturity nears, Fitch adjusts its loss expectations to account for the reduced loss exposure window.

Home Price Appreciation: Property values in the reference pools have benefitted from home price appreciation since issuance. Since 2013, home prices have increased 19% nationally and 31% in California. The reference pools have experienced an average gain in property values of nearly 25%.

Counterparty Dependence on Fannie Mae: The notes are general unsecured obligations of Fannie Mae and are subject to the performance of the reference pool. Fannie Mae will be responsible for making monthly payments of interest and principal to investors based on the payment priorities of the transaction. Due to the counterparty dependence, Fitch's rating is based on the lower of: 1) the quality of the mortgage loan reference pool and credit enhancement available through subordination, and 2) Fannie Mae's issuer default rating (IDR). Fannie Mae's IDR is currently 'AAA'/Stable Outlook, reflecting a direct link to the U.S. sovereign rating.

RATING SENSITIVITIES

Fitch's analysis includes rating stress scenarios from 'CCCsf' to 'AAAsf'. The 'CCCsf' scenario is intended to be the most-likely base-case scenario. Rating scenarios above 'CCCsf' are increasingly more stressful and less likely to occur. Although many variables are adjusted in the stress scenarios, the primary driver of the loss scenarios is the home price forecast assumption. In the 'Bsf' scenario, Fitch assumes home prices decline 10% below their long-term sustainable level. The home price decline assumption is increased by 5% at each higher rating category up to a 35% decline in the 'AAAsf' scenario.

The ratings of bonds currently rated 'Bsf' or higher will be sensitive to future mortgage borrower behavior, which historically has been strongly correlated with home price movements. Despite recent positive trends, Fitch currently expects home prices to decline in some regions before reaching a sustainable level. While Fitch's ratings reflect this home price view, the ratings of outstanding classes may be subject to revision to the extent actual home price and mortgage performance trends differ from those currently projected by Fitch.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

Third party due diligence was reviewed as part of Fitch's rating of the M-1 classes at deal issuance. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. Fitch received certifications indicating that the loan-level due diligence was conducted in accordance with Fitch's published standards. The certifications also stated that the company performed its work in accordance with the independence standards, per Fitch's criteria, and that the due diligence analysts performing the review met Fitch's criteria of minimum years of experience. Fitch considered this information in its analysis and the findings did not have an impact on the analysis. No additional due diligence was considered in rating of the M-2 classes.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of each transactions' representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering documents and which relate to the underlying asset pool are available by accessing the corresponding appendix referenced under "Related Research" below. Each appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated March 26, 2015.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/site/re/884963

Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 08 Mar 2016)

https://www.fitchratings.com/site/re/878513

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)

https://www.fitchratings.com/site/re/864368

U.S. RMBS Loan Loss Model Criteria (pub. 12 May 2016)

https://www.fitchratings.com/site/re/880673

U.S. RMBS Master Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/882350

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 17 Jun 2016)

https://www.fitchratings.com/site/re/881806

Related Research

Connecticut Avenue Securities Series 2013-C01 -- Appendix

https://www.fitchratings.com/site/re/722960

Connecticut Avenue Securities, Series 2014-C01 -- Appendix

https://www.fitchratings.com/site/re/733316

Connecticut Avenue Securities, Series 2014-C02: Appendix

https://www.fitchratings.com/site/re/750404

Connecticut Avenue Securities, Series 2014-C03-- Appendix

https://www.fitchratings.com/site/re/762349

Connecticut Avenue Securities, Series 2015-C01 -- Appendix

https://www.fitchratings.com/site/re/864557

GSE CRT Loss Projections

https://www.fitchratings.com/site/re/885612

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010974

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010974

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160830005910/en/

Fitch Ratings
Primary Analyst
Ryan O'Loughlin
Associate Director
+1-212-908-0387
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Roelof Slump
Managing Director
+1-212-908-0705
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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