Fitch Rates Agate Bay Mortgage Trust 2016-3

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned ratings to Agate Bay Mortgage Trust 2016-3 as follows:

--$246,318,000 class A-6 certificates 'AAAsf'; Outlook Stable;

--$82,106,000 class A-8 certificates 'AAAsf'; Outlook Stable;

--$24,109,000 class A-10 certificates 'AAAsf'; Outlook Stable;

--$352,533,000 class A-X-1 notional certificates 'AAAsf'; Outlook Stable;

--$246,318,000 class A-X-4 notional certificates 'AAAsf'; Outlook Stable;

--$82,106,000 class A-X-5 notional certificates 'AAAsf'; Outlook Stable;

--$24,109,000 class A-X-6 notional certificates 'AAAsf'; Outlook Stable;

--$8,287,000 class B-1 certificates 'AAsf'; Outlook Stable;

--$6,026,000 class B-2 certificates 'Asf'; Outlook Stable;

--$4,519,000 class B-3 certificates 'BBBsf'; Outlook Stable;

--$2,260,000 class B-4 certificates 'BBsf'; Outlook Stable.

Exchangeable Certificates:

--$352,533,000 class A-1 exchangeable certificates 'AAAsf'; Outlook Stable;

--$352,533,000 class A-2 exchangeable certificates 'AAAsf'; Outlook Stable;

--$328,424,000 class A-3 exchangeable certificates 'AAAsf'; Outlook Stable;

--$328,424,000 class A-4 exchangeable certificates 'AAAsf'; Outlook Stable;

--$246,318,000 class A-5 exchangeable certificates 'AAAsf'; Outlook Stable;

--$82,106,000 class A-7 exchangeable certificates 'AAAsf'; Outlook Stable;

--$24,109,000 class A-9 exchangeable certificates 'AAAsf'; Outlook Stable;

--$352,533,000 class A-X-2 exchangeable notional certificates 'AAAsf'; Outlook Stable;

--$328,424,000 class A-X-3 exchangeable notional certificates 'AAAsf'; Outlook Stable.

The $3,013,837 class B-5 certificates and $376,638,837 class A-IO-S notional certificates will not be rated.

KEY RATING DRIVERS

High-Quality Mortgage Pool: The collateral pool consists of high-quality 30-year, fixed-rate, fully amortizing loans to borrowers with strong credit profiles, low leverage and large liquid reserves. The pool has a weighted average (WA) FICO score of 772 and an original combined loan-to-value (CLTV) ratio of 69%. The collateral attributes of the subject pool are largely consistent with recent ABMT transactions issued in 2015 and 2016.

Geographic Concentration Risk: The pool's primary concentration risk is in California, where approximately 34.5% of the collateral is located, 27.3% of which is located in the metropolitan areas encompassing Los Angeles, San Francisco and San Jose. This distribution shows strong improvement in geographic diversification over previous ABMT transactions. As a result, no penalty was applied to the pool's probability of default (PD) to account for geographic concentration risk.

Tier 1 Framework with Possible Counterparty Risk: Fitch considers the transaction's representation, warranty and enforcement (RW&E) mechanism framework to be consistent with Tier I quality. The transaction benefits from life-of-loan R&W, as well as a backstop by the seller, TH TRS, in case of insolvency or dissolution of the related originator. However, Fitch increased its loss expectations to account for the closure of the mortgage conduit operations by TH TRS's parent, Two Harbors Investment Corp., and the possibility that TH TRS may be unable to fulfill future repurchase obligations.

Originators with Limited Performance History: Many of the loans were originated by lenders with a limited non-agency performance history. However, this is mitigated by Fitch's assessment of Two Harbors as an above-average aggregator. With the exception of Movement Mortgage, LLC (4% of the pool), whose loans were originated and reviewed according to its own guidelines, all loans were originated to meet TH TRS's purchase criteria and were reviewed by a third-party due diligence firm to TH TRS's guidelines, with no material findings. TH TRS is a wholly owned subsidiary of Two Harbors. In addition, Fitch conducted an onsite review or in-depth call with four of the top five originators, which account for approximately 38% of the pool.

Extraordinary Expense Treatment: The trust provides for expenses, including indemnification amounts and costs of arbitration, to be paid by the net WA coupon of the loans, which does not affect the contractual interest due on the certificates. Furthermore, the expenses to be paid from the trust are capped at $300,000 per annum ($125,000 for the trustee), which can be carried over each year, subject to the cap until paid in full.

CRITERIA APPLICATION

Fitch's analysis incorporated one criteria variation. The due diligence review for ABMT 2016-3 was conducted prior to the June 2016 publication of Fitch's report "U.S. RMBS Master Rating Criteria". While the final due diligence grades were calibrated to Fitch's updated grading matrix as described in its criteria, the TRID reporting detail expected to be provided to Fitch under the updated criteria had not been established by the TPR firm at the time it conducted the loan-level review for this transaction. Therefore, the reports generated by the TPR for this transaction are not consistent with Fitch's updated criteria for TRID, but will be going forward for loans reviewed after July 2016. There was no impact on Fitch's ratings given the due diligence grading results and additional documentation provided to clear any exceptions.

RATING SENSITIVITIES

After Fitch determines credit ratings through a rating stress scenario analysis, additional sensitivity analyses are considered. The analyses provide a defined stress sensitivity to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at issuance as well as a defined sensitivity that demonstrates the stress assumptions required to reduce a rating by one full category, to non-investment grade, and to 'CCCsf'.

The defined stress sensitivity analysis focuses on determining how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10%, 20%, and 30%, in addition to the model projected 6.2% for this pool. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.

Fitch also conducted defined rating sensitivity analyses which determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'. For example, additional MVDs of 7%, 32% and 53% could potentially lower the 'AAAsf' rated class one rating category, to non-investment grade, and to 'CCCsf'

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

Fitch was provided with due diligence information from Clayton Services LLC and American Diligence, LLC. The due diligence focused on a compliance, credit, valuation and data integrity review. Fitch considered this information in its analysis and the findings did not have an adverse impact on our analysis.

Fitch received certifications indicating that the loan-level due diligence was conducted in accordance with Fitch's published standards for credit, property valuation and legal/regulatory compliance. The certifications also stated that the company performed its work in accordance with the independence standards, per Fitch's criteria.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under 'Related Research' below. The 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 May 2016.

Sources of Information:

In addition to the information sources identified in Fitch's criteria listed below, Fitch's analysis incorporated data tapes, due diligence results, deal structure and legal documents provided on the transaction's 17g5 website available on 'www.structuredfn.com'.

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 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 Cash Flow Analysis Criteria (pub. 15 Apr 2016)

https://www.fitchratings.com/site/re/880006

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

Agate Bay Mortgage Trust 2016-3 -- Appendix

https://www.fitchratings.com/site/re/886040

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010992

ABS Due Diligence Form 15E 1

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1010992&flm_nm=15e_1010992_1.pdf

ABS Due Diligence Form 15E 2

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1010992&flm_nm=15e_1010992_2.pdf

ABS Due Diligence Form 15E 3

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1010992&flm_nm=15e_1010992_3.pdf

ABS Due Diligence Form 15E 4

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1010992&flm_nm=15e_1010992_4.pdf

ABS Due Diligence Form 15E 5

https://www.fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=1010992&flm_nm=15e_1010992_5.pdf

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010992

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/20160830006278/en/

Fitch Ratings
Primary Analyst
Christine Yan
Director
+1-212-908-0838
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Matthew Shaw
Associate Director
+1-212-908-0218
or
Committee Chairperson
Suzanne Mistretta
Senior Director
+1-212-908-0639
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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