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Flagstar Mortgage Trust 2021-1 -- Moody's assigns provisional ratings to prime RMBS issued by Flagstar Mortgage Trust 2021-1

·26 min read

Rating Action: Moody's assigns provisional ratings to prime RMBS issued by Flagstar Mortgage Trust 2021-1Global Credit Research - 16 Feb 2021New York, February 16, 2021 -- Moody's Investors Service, ("Moody's") has assigned provisional ratings to forty-five classes of residential mortgage-backed securities (RMBS) issued by Flagstar Mortgage Trust 2021-1 (FSMT 2021-1). The ratings range from (P)Aaa (sf) to (P)B2 (sf).FSMT 2021-1 is a securitization of first-lien prime jumbo and agency eligible mortgage loans. The transaction is backed by 574 30-year fixed rate prime jumbo and agency eligible mortgage loans with an aggregate stated principal balance of $488,656,342. There are 463 (84.00% by unpaid principal balance) and 111 (14.00% by unpaid principal balance) prime jumbo and agency eligible mortgage loans, respectively. The average stated principal balance is $851,318.All 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. 100% of the loans are originated by Flagstar Bank, FSB (Flagstar).Flagstar (Long Term Issuer Baa3) will service the mortgage loans. Servicing compensation is subject to a step-up incentive fee structure. Wells Fargo Bank, N.A. (Long Term Issuer Aa2) will be the master servicer. Flagstar will be responsible for principal and interest advances as well as other servicing advances. The master servicer will be required to make principal and interest advances if Flagstar is unable to do so.One third-party review (TPR) firm 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 approximately 39.55% 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. Initially, there were 232 mortgage loans to be reviewed. However, five loans were removed from the pool because they either didn't meet the sponsor's program parameters or were missing verification of employment or balance sheets. However, the sample size of 227 loans reviewed did not meet our credit neutral criteria. We made adjustment to our loss levels to account for this risk.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. Overall, this pool has average credit risk profile as compared to that of recent prime jumbo transactions.The securitization has a shifting interest structure with a five-year lockout period that benefits from a senior floor and a subordinate floor. We coded the cash flow to each of the certificate classes using Moody's proprietary cash flow tool.The complete rating actions are as follows:Issuer: Flagstar Mortgage Trust 2021-1Cl. A-1, Assigned (P)Aaa (sf)Cl. A-2, Assigned (P)Aaa (sf)Cl. A-3, Assigned (P)Aa1 (sf)Cl. A-4, Assigned (P) Aa1 (sf)Cl. A-5, Assigned (P)Aaa (sf)Cl. A-6, Assigned (P)Aaa (sf)Cl. A-7, Assigned (P)Aaa (sf)Cl. A-8, Assigned (P)Aaa (sf)Cl. A-9, Assigned (P)Aaa (sf)Cl. A-10, Assigned (P)Aaa (sf)Cl. A-11, Assigned (P)Aaa (sf)Cl. A-11-X*, Assigned (P)Aaa (sf)Cl. A-12, Assigned (P)Aaa (sf)Cl. A-13, Assigned (P)Aaa (sf)Cl. A-14, Assigned (P)Aaa (sf)Cl. A-15, Assigned (P)Aa1 (sf)Cl. A-16, Assigned (P)Aaa (sf)Cl. A-17, Assigned (P)Aaa (sf)Cl. A-18, Assigned (P)Aaa (sf)Cl. A-19, Assigned (P)Aaa (sf)Cl. A-20, Assigned (P)Aaa (sf)Cl. A-X-1*, Assigned (P)Aaa (sf)Cl. A-X-2*, Assigned (P)Aaa (sf)Cl. A-X-3*, Assigned (P)Aa1 (sf)Cl. A-X-4*, Assigned (P) Aa1 (sf)Cl. A-X-5*, Assigned (P)Aaa (sf)Cl. A-X-6*, Assigned (P)Aa1 (sf)Cl. A-X-7*, Assigned (P)Aaa (sf)Cl. A-X-8*, Assigned (P)Aaa (sf)Cl. A-X-9*, Assigned (P)Aaa (sf)Cl. A-X-13*, Assigned (P)Aaa (sf)Cl. A-X-17*, Assigned (P)Aaa (sf)Cl. B-1, Assigned (P)Aa3 (sf)Cl. B-1-X*, Assigned (P)Aa3 (sf)Cl. B-1-A, Assigned (P)Aa3 (sf)Cl. B-2, Assigned (P)A2 (sf)Cl. B-2-X*, Assigned (P)A2 (sf)Cl. B-2-A, Assigned (P)A2 (sf)Cl. B-3, Assigned (P)Baa2 (sf)Cl. B-3-X*, Assigned (P)Baa2 (sf)Cl. B-3-A, Assigned (P)Baa2 (sf) Cl. B-4, Assigned (P)Ba2 (sf) Cl. B-5, Assigned (P)B2 (sf) Cl. B, Assigned (P)A3 (sf) Cl. B-X*, Assigned (P)A3 (sf) *Reflects Interest-Only ClassesSummary Credit Analysis and Rating RationaleMoody's expected loss for this pool in a baseline scenario is 0.36% at the mean, 0.19% at the median, and reaches 3.81% at a stress level consistent with our Aaa ratings.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of residential mortgage loans from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.We increased our model-derived median expected losses by 15% (10.15% for the mean) and our Aaa losses by 5% to reflect the likely performance deterioration resulting from a slowdown in US economic activity due to the coronavirus outbreak.We regard the coronavirus 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.Collateral descriptionFlagstar Mortgage Trust 2021-1 (FSMT 2021-1) is the first issuance from Flagstar Mortgage Trust in 2021. Flagstar Bank, FSB is the sponsor of the transaction.FSMT 2021-1 is a securitization of first-lien prime jumbo and agency eligible mortgage loans. The transaction is backed by 463 (84% by unpaid principal balance) and 111 (16% by unpaid principal balance) 30-year fixed rate prime jumbo and agency eligible mortgage loans, respectively, with an aggregate stated principal balance of $488,656,342. The average stated principal balance is $851,318 and the weighted average (WA) current mortgage rate is 3.19%. Borrowers of the mortgage loans backing this transaction have strong credit profiles demonstrated by strong credit scores and low loan-to-value (LTV) ratios. The weighted average primary borrower original FICO score and original LTV ratio of the pool is 778 and 67.03%, respectively. The WA original debt-to-income (DTI) ratio is 32.64%. The average borrower total monthly income is $27,906 with an average $246,280 of liquid cash reserves. Approximately, 43.41% by loan balance of the borrowers in the pool have more than one mortgage. However, there is no single borrower with multiple mortgages in the pool.Overall, this pool has average credit risk profile as compared to that of recent prime jumbo transactions.Approximately half of the mortgages (46.57% by loan balance) are backed by properties located in California. The next largest geographic concentration is Florida (11.22% by loan balance), Texas (9.59% by loan balance), and Colorado (5.34% by loan balance). All other states each represent 4% or less by loan balance. Approximately 0.70% (by loan balance) of the pool is backed by properties that are 2-to-4 unit residential properties whereas loans backed by single family residential properties represent 64.38% (by loan balance) of the pool.Approximately 39.41% of the loans (by loan balance) were originated through the correspondent channel. Additionally, 35.91% (by loan balance) of the loans were originated through the broker channel and the remaining 24.68% (by loan balance) were originated through the retail channel.Origination Quality and Underwriting Guidelines100% of the loans in the pool are originated by Flagstar. The prime jumbo loans in the pool are underwritten per Flagstar's Jumbo (70.87% by unpaid principal balance) and Jumbo Express (13.14% by unpaid principal balance ) underwriting guidelines. Both programs offer 30-yr fixed rate loans. However, loans originated under the Jumbo program require manual underwriting and loans originated under the Jumbo Express program require a valid Desktop Underwriter (DU) response. The maximum loan amount under the Jumbo Express program is limited to that of high balance conforming loan limit of $822,375. We consider Flagstar an adequate originator of prime jumbo and conforming mortgages. As a result, we did not make any adjustments (positive or negative) to losses based on our assessment of origination quality.Servicing arrangementWe consider the overall servicing arrangement for this pool to be adequate. Flagstar will service the mortgage loans. Flagstar will be responsible for principal and interest advances as well as other servicing advances. Wells Fargo Bank, N.A., the master servicer, will be required to make principal and interest advances if Flagstar is unable to do so. We did not make any adjustments to our base case and Aaa stress loss assumptions based on this servicing arrangement.Covid-19 Impacted BorrowersAs of the cut-off date, no borrower in the pool has entered a COVID-19 related forbearance plan with the servicer. However, there are five borrowers in the pool that had previously inquired about the forbearance plan but never entered it. Also, if any borrower enters or requests a COVID-19 related forbearance plan from the cut-off date to the closing date, then the associated mortgage loan will be removed from the pool. In the event a borrower enters or requests a COVID-19 related forbearance plan after the closing date, such mortgage loan (and the risks associated with it) will remain in the mortgage pool.Servicing compensation for loans in this transaction is based on a fee-for-service incentive structure. The fee-for-service incentive structure includes an initial monthly base fee of $20.5 for all performing loans and increases according to certain delinquent and incentive fee schedules. By establishing a base servicing fee for performing loans that increases with the delinquency of loans, the fee-for-service structure aligns monetary incentives to the servicer with the costs of the servicer. The servicer receives higher fees for labor-intensive activities that are associated with servicing delinquent loans, including loss mitigation, than they receive for servicing a performing loan, which is less labor intensive. The fee-for-service compensation is reasonable and adequate for this transaction.Third-party reviewThe credit, compliance, property valuation, and data integrity portion of the third-party review (TPR) was conducted on a total of approximately 39.55% (227 loans) of the pool (by loan count). Initially, there were 232 mortgage loans included in the pool to be reviewed. However, five loans were removed from the pool because they either didn't meet the sponsor's program parameters or were missing verification of employment or balance sheets. 100% of the loans reviewed received a grade B or higher with 92.07% of loans receiving an A grade.While the TPR results indicated compliance with the originators' underwriting guidelines for most of the loans, no material compliance issues and no material appraisal defects, the total sample size of 227 loans reviewed did not meet our credit neutral criteria. We, therefore made an adjustment to loss levels to account for this risk.Representations and Warranties FrameworkFlagstar Bank, FSB (Long Term Issuer Baa3), the originator as well as an investment-grade rated entity, makes the loan-level representation and warranties (R&Ws) for the mortgage loans. The loan-level R&Ws are strong and, in general, either meet or exceed the baseline set of credit-neutral R&Ws we have identified for US RMBS. Further, R&W breaches are evaluated by an independent third party using a set of objective criteria to determine whether any R&Ws were breached when (1) the loan becomes 120 days delinquent, (2) the servicer stops advancing, (3) the loan is liquidated at a loss or (4) the loan becomes between 30 days and 119 days delinquent and is modified by the servicer. Similar to J.P. Morgan Mortgage Trust (JPMMT) transactions, the transaction contains a "prescriptive" R&W framework. These reviews are prescriptive in that the transaction documents set forth detailed tests for each R&W that the independent reviewer will perform.We assessed the R&W framework for this transaction as adequate. We analyzed the strength of the R&W provider, the R&Ws themselves and the enforcement mechanisms. The R&W provider is rated investment grade, the breach reviewer is independent, and the breach review process is thorough, transparent and objective. We did not make any additional adjustment to our base case and Aaa loss expectations for R&Ws.Transaction structureThe securitization has a shifting interest structure that benefits from a senior floor and a subordinate floor. Funds collected, including principal, are first used to make interest payments and then principal payments to the senior bonds, and then interest and principal payments to each subordinate bond. As in all transactions with shifting interest structures, the senior bonds benefit from a cash flow waterfall that allocates all prepayments to the senior bond for a specified period and increasing amounts of prepayments to the subordinate bonds thereafter, but only if loan performance satisfies delinquency and loss tests.All certificates (except Class B-6-C) in this transaction are subject to a net WAC cap. Class B-6-C will accrue interest at the net WAC minus the aggregate delinquent servicing and aggregate incentive servicing fee. For any distribution date, the net WAC will be the greater of (1) zero and (2) the weighted average net mortgage rates minus the capped trust expense rate.Realized losses are allocated reverse sequentially among the subordinate, starting with most junior, and senior support certificates and on a pro-rata basis among the super senior certificates.Tail risk & subordination floorThe 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 eroding credit enhancement over time and increased performance volatility, known as tail risk. To mitigate this risk, the transaction provides for a senior subordination floor of 1.00% 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 1.00% of the closing pool balance.We calculate the credit neutral floors for a given target rating as shown in our principal methodology. The senior subordination floor and the subordinate floor of 1.00% are consistent with the credit neutral floors for the assigned ratings.Factors that would lead to an upgrade or downgrade of the ratings:DownLevels 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.UpLevels 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.MethodologyThe 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. REGULATORY DISCLOSURESFor 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_1265353.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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Jay H. Thacker Asst Vice President - Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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