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Rating Action: Moody's assigns definitive ratings to Prime RMBS issued by CIM Trust 2020-J1
Global Credit Research - 30 Jul 2020
New York, July 30, 2020 -- Moody's Investors Service ("Moody's") has assigned definitive ratings to 34 classes of residential mortgage-backed securities (RMBS) issued by CIM Trust (CIM) 2020-J1. The ratings range from Aaa (sf) to B1 (sf).
CIM Trust 2020-J1 (CIM 2020-J1) is a securitization of 30-year prime residential mortgages. This transaction represents the first non-investor prime jumbo issuance by Chimera Investment Corporation (the sponsor) in 2020. The transaction includes 494 fixed rate, first lien-mortgages. There are 198 GSE-eligible high balance (31.90% by balance) and 296 prime jumbo (68.10% by loan balance) mortgage loans in the pool. The mortgage loans for this transaction have been acquired by the affiliate of the sponsor, Fifth Avenue Trust (the Seller) from Bank of America, National Association (BANA).
All of the loans are designated as qualified mortgages (QM) either under the QM safe harbor or the GSE temporary exemption under the Ability-to-Repay (ATR) rules. Shellpoint Mortgage Servicing (SMS) will service the loans and Wells Fargo Bank, N.A. (Aa2, long term debt) will be the master servicer. SMS will be the servicer and responsible for advancing principal and interest and servicing advances, with the master servicer backing up SMS' advancing obligations if SMS cannot fulfill them.
Four third-party review (TPR) firms verified the accuracy of the loan level information that we received from the Sponsor. These firms conducted detailed credit, property valuation, data accuracy and compliance reviews on 100% of the mortgage loans in the collateral pool. The TPR results indicate that there are no material compliance, credit, or data issues and no appraisal defects.
We analyzed the underlying mortgage loans using Moody's Individual Loan Analysis (MILAN) model. We also compared the collateral pool to other prime jumbo securitizations. In addition, we adjusted our expected losses based on qualitative attributes, including the financial strength of the representation and warranties (R&W) provider and TPR results.
CIM 2020-J1 has a shifting interest structure with a five-year lockout period that benefits from a senior subordination floor and a subordinate floor. We coded the cash flow to each of the certificate classes using Moody's proprietary cash flow tool. In our analysis of tail risk, we considered the increased risk from borrowers with more than one mortgage in the pool.
The complete rating actions are as follows:
Issuer: CIM Trust 2020-J1 Cl. A-1, Assigned Aaa (sf) Cl. A-2, Assigned Aaa (sf) Cl. A-3, Assigned Aaa (sf) Cl. A-4, Assigned Aaa (sf) Cl. A-5, Assigned Aaa (sf) Cl. A-6, Assigned Aaa (sf) Cl. A-7, Assigned Aaa (sf) Cl. A-8, Assigned Aaa (sf) Cl. A-9, Assigned Aaa (sf) Cl. A-10, Assigned Aaa (sf) Cl. A-11, Assigned Aaa (sf) Cl. A-12, Assigned Aaa (sf) Cl. A-13, Assigned Aa1 (sf) Cl. A-14, Assigned Aa1 (sf) Cl. A-15, Assigned Aaa (sf) Cl. A-16, Assigned Aaa (sf) Cl. A-IO1*, Assigned Aaa (sf) Cl. A-IO2*, Assigned Aaa (sf) Cl. A-IO3*, Assigned Aaa (sf) Cl. A-IO4*, Assigned Aaa (sf) Cl. A-IO5*, Assigned Aaa (sf) Cl. A-IO6*, Assigned Aaa (sf) Cl. A-IO7*, Assigned Aaa (sf) Cl. A-IO8*, Assigned Aa1 (sf) Cl. A-IO9*, Assigned Aaa (sf) Cl. B-1, Assigned Aa3 (sf) Cl. B-IO1*, Assigned Aa3 (sf) Cl. B-1A, Assigned Aa3 (sf) Cl. B-2, Assigned A2 (sf) Cl. B-IO2*, Assigned A2 (sf) Cl. B-2A, Assigned A2 (sf) Cl. B-3, Assigned Baa2 (sf) Cl. B-4, Assigned Ba1 (sf) Cl. B-5, Assigned B1 (sf)
*Reflects Interest Only Classes
Summary Credit Analysis and Rating Rationale
Moody's expected loss for this pool in a baseline scenario is 0.32% at the mean and 0.15% at the median, and reaches 4.32% at a stress level consistent with our Aaa ratings.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of US RMBS from the collapse in the US economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections.
The contraction in economic activity in the second quarter was severe and the overall recovery in the second half of the year will be gradual. However, there are significant downside risks to our forecasts in the event that the pandemic is not contained and lockdowns have to be reinstated. As a result, the degree of uncertainty around our forecasts is unusually high. We increased our model-derived median expected losses by 15% (approximately 10% for the mean) and our Aaa losses by 5% to reflect the likely performance deterioration resulting from of a slowdown in US economic activity in 2020 due to the COVID-19 outbreak.
We regard the COVID-19 outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
We base our ratings on the certificates on the credit quality of the mortgage loans, the structural features of the transaction, our assessments of the origination quality and servicing arrangement, the strength of the third-party due diligence and the R&W framework of the transaction.
We assessed the collateral pool as of the cut-off date of July 1, 2020. CIM 2020-J1 is a securitization of 494 mortgage loans with an aggregate principal balance of $361,766,033.93. This transaction consists of fixed-rate fully amortizing loans, which will not expose the borrowers to any interest rate shock for the life of the loan or to refinance risk. All of the mortgage loans are secured by first liens on one- to four- family residential properties, condominiums, and planned unit developments. The loans have a weighted average seasoning of approximately six months.
Overall, the credit quality of the mortgage loans backing this transaction is in line with recently issued prime jumbo transactions. The WA FICO of the aggregate pool is 771 (770 in CIM 2019-J2 and CIM 2019-J1) with a WA LTV of 66.6% (70.3% in CIM 2019-J2 and 65.9% in CIM 2019-J1) and WA CLTV of 66.9%. (70.3% in CIM 2019-J2 and CIM 66.1% in 2019-J1) Approximately 29.9% (by loan balance) of the pool has a LTV ratio greater than 75% compared to 42.8% in CIM 2019-J2 and 31.5% in CIM 2019-J1.
There are 17 originators in the transaction, some of which may have limited history of securitizing prime jumbo mortgages. The largest originators in the pool with more than 5% by balance are loanDepot.com, LLC (25.0%), Home Point Financial Corporation (15.8%), AmeriHome Mortgage Company LLC (10.9%), United Shore Financial Services, LLC (9.6%), Guaranteed Rate, Inc. (7.1%), NewRez, LLC (6.1%) and JMAC Lending Inc. (5.1%).
Approximately 68.20% of the loans by loan balance are prime jumbo loans, of which 50.7% were underwritten to Chimera's underwriting guidelines and 17.38% of the loans were underwritten to respective originator guidelines. 31.9% of the loans are conforming loans and were originated in conformance to GSE guidelines with no overlays. The GSE-eligible loans also do not include loans originated under the GSEs' affordability programs such as HomeReady and HomePossible. None of the GSE-eligible loans were originated under streamlined documentation programs such as DU Refi Plus. All of the loans are designated as qualified mortgages (QM) either under the QM safe harbor or the GSE temporary exemption under the Ability-to-Repay (ATR) rules.
We increased our base case and Aaa loss expectations for all loans underwritten to Chimera's underwriting guidelines, as we consider the underwriting guidelines to be slightly weaker. For loans that were not acquired under Chimera's guidelines, we made adjustments based on the origination quality of such loans. While we were neutral on all GSE-eligible loans, of note, regardless of the underwriting channel, we increased our base case and Aaa loss expectations for conforming loans originated by HomePoint (3.71% of aggregate collateral balance).
Of note, for 14 loans, the file was missing an appraisal because such loan was approved via a property inspection/appraisal waiver program. An appraisal waiver loan is a loan for which a traditional appraisal has been waived. Since the product was only introduced relatively recently, in a positive macro-economic environment, sufficient time has not passed to determine whether the loan level valuation risk related to a GSE loan with an appraisal waiver is the same as a GSE loan with a traditional appraisal due to lack of significant data. Thus, to account for the risk associated with this product, we increased our base case and Aaa loss expectations for all such loans.
Third Party Review
Four third-party review (TPR) firms, Clayton Services LLC, Digital Risk, LLC, Consolidated Analytics, Inc, and Opus Capital Markets Consultants, LLC, verified the accuracy of the loan level information that the sponsor gave us. These firms conducted detailed credit, property valuation, data accuracy and compliance reviews on 100% of the mortgage loans in the collateral pool. The TPR results indicate that the majority of reviewed loans were in compliance with respective originators' underwriting guidelines, no material compliance or data issues, and no appraisal defects.
The overall property valuation review for this transaction is in line with most prime jumbo transactions we have rated, which typically had third-party valuation products, such as collateral desk appraisal (CDA), field review and automated valuation model (AVM) or a Collateral Underwriter (CU) risk score. However, in some circumstances, the deal is utilizing exclusively AVMs as a comparison to verify the original appraisals for some loans, which is weaker than if they had done so using CDAs for such loans and/or the entire pool. We took this framework into consideration and did not apply an adjustment to the loss for such loans since the statistically significant sample size and valuation results of the loans that were reviewed using a third-party valuation product such as a CDA, field review, and a CU risk score of equal to or less than 2.5 (in the case of GSE-eligible loans) were sufficient.
Of note, for property valuation, of the 527 loans reviewed, 1 loan was graded level C and all other loans had level A and B property valuation grades. For the loan graded C, the appraised value from appraisal in file ($1,115,000) was not supported by a desk review (-10.31% variance percent). Similarly to the desk review, the field review also supported the value of $1,000,000.00, therefore, this value was ultimately utilized when calculating the LTV/CLTV. Therefore, we did not make any additional adjustment to our base case and Aaa loss expectations for TPR.
Reps & Warranties (R&W)
All loans were aggregated by Bank of America National Association (BANA) through its whole loan aggregation program. Each originator will provide comprehensive loan level reps and warranties for their respective loans. BANA will assign each originator's R&W to the seller, who will in turn assign to the depositor, which will assign to the trust. To mitigate the potential concerns regarding the originators' ability to meet their respective R&W obligations, the R&W provider will backstop the R&Ws for all originators loans. The R&W provider's obligation to backstop third party R&Ws will terminate five years after the closing date, subject to certain performance conditions. The R&W provider will also provide the gap reps.
The R&W framework is adequate in part because the results of the independent TPRs revealed a high level of compliance with underwriting guidelines and regulations, as well as overall adequate appraisal quality. These results give confidence that the loans do not systemically breach the R&Ws the originators have made and that the originators are unlikely to face material repurchase requests in the future. The loan-level R&Ws are strong and, in general, either meet or exceed the baseline set of credit-neutral R&Ws we identified for US RMBS. Among other considerations, the R&Ws address property valuation, underwriting, fraud, data accuracy, regulatory compliance, the presence of title and hazard insurance, the absence of material property damage, and the enforceability of mortgage.
In a continued effort to focus breach reviews on loans that are more likely to contain origination defects that led to or contributed to the delinquency of the loan, an additional carve out has been in recent transactions we have rated from other issuers relating to the delinquency review trigger. Similarly, in this transaction, exceptions exist for certain excluded disaster mortgage loans that trip the delinquency trigger. These excluded disaster loans include COVID-19 forbearance loans.
Tail Risk and Subordination Floor
The transaction cash flows follow a shifting interest structure that allows subordinated bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool shrinks, senior bonds are exposed to increased performance volatility, known as tail risk. The transaction provides for a senior subordination floor of 1.10% of the closing pool balance, which mitigates tail risk by protecting the senior bonds from eroding credit enhancement over time. Additionally, there is a subordination lock-out amount which is 0.60% of the closing pool balance.
In CIM 2020-J1, the controlling holder has the option to hire at its own expense the independent reviewer upon the occurrence of a review event. If there is no controlling holder (no single entity holds a majority of the Class Principal Amount of the most subordinate class of certificates outstanding), the trustee shall, upon receipt of a direction of the certificate holders of more than 25% of the aggregate voting interest of all certificates and upon receipt of the deposit, appoint an independent reviewer at the cost of the trust. However, if the controlling holder does not hire the independent reviewer, the holders of more than 50% of the aggregate voting interests of all outstanding certificates may direct (at their expense) the trustee to appoint an independent reviewer. In this transaction, the controlling holder can be the depositor or a seller (or an affiliate of these parties). If the controlling holder is affiliated with the depositor, seller or Sponsor, then the controlling holder may not be motivated to discover and enforce R&W breaches for which its affiliate is responsible.
The servicer will not commence foreclosure proceedings on a mortgage loan unless the servicer has notified the controlling holder at least five business days in advance of the foreclosure and the controlling holder has not objected to such action. If the controlling holder objects, the servicer has to obtain three appraisals from the appraisal firms as listed in the pooling and servicing agreement. The cost of the appraisals are borne by the controlling holder. The controlling holder will be required to purchase such mortgage loan at a price equal to the highest of the three appraisals plus accrued and unpaid interest on such mortgage loan as of the purchase date. If the servicer cannot obtain three appraisals there are alternate methods for determining the purchase price. If the controlling holder fails to purchase the mortgage loan within the time frame, the controlling holder forfeits any foreclosure rights thereafter. We consider this credit neutral because a) the appraiser is chosen by the servicer from the approved list of appraisers, b) the fair value of the property is decided by the servicer, based on third party appraisals, and c) the controlling holder will pay the fair price and accrued interest.
Servicing Arrangement / COVID-19 Impacted Borrowers
As of July 20, 2020, no borrower under any mortgage loan has entered into a Covid-19 related forbearance plan with the servicer. In the event that after the July 20, 2020 date a borrower enters into or requests a Covid-19 related forbearance plan, such mortgage loan will remain in the mortgage pool and the servicer will be required to make advances in respect of delinquent interest and principal (as well as servicing advances) on such mortgage loan during the forbearance period (to the extent such advances are deemed recoverable). Forbearances are being offered in accordance with applicable state and federal regulatory guidelines and the homeowner's individual circumstances. At the end of the forbearance period, as with any other modification, to the extent the related borrower is not able to make a lump sum payment of the forborne amount, the servicer may, subject to the servicing matrix, offer the borrower a repayment plan, enter into a modification with the borrower (including a modification to defer the forborne amounts) or utilize any other loss mitigation option permitted under the pooling and servicing agreement.
As with any other modification, it is anticipated that the servicer will reimburse itself at the end of the forbearance period for any advances made by it with respect to such mortgage loan, whether that be from any lump sum payments made by the related borrower, from any increased payments received with respect to any repayment plan entered into by the borrower, or, if modified and capitalized in connection therewith, at the time of such modification as a reimbursement of such capitalized advances from principal collections on all of the mortgage loans. The servicer also has the right to reimburse itself for any advance from all collections on the mortgage loans it at any time it deems such advance to be non-recoverable. With respect to a mortgage loan that was the subject of a servicing modification, the amount of principal of the mortgage loan, if any, that has been deferred and that does not accrue interest will be treated as a realized loss and to the extent any such amount is later recovered, will result in the allocation of a subsequent recovery.
Factors that would lead to an upgrade or downgrade of the ratings:
Levels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody's original expectations as a result of a higher number of obligor defaults or deterioration in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.
Levels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline from Moody's original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market.
The principal methodology used in rating all classes except interest-only classes was "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303. The methodologies used in rating interest-only classes were "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179. Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1239580 .
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Philip Rukosuev Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Sonny Weng Vice President - Senior Analyst Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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