Rating Action: Moody's assigns provisional ratings to Station Place Securitization Trust 2021-WL1
Global Credit Research - 13 Jan 2021
New York, January 13, 2021 -- Moody's Investors Service, ("Moody's") has assigned provisional ratings to six classes of notes issued by Station Place Securitization Trust 2021-WL1. The securities are backed by a revolving pool of newly originated firstlien, fixed rate and adjustable rate, residential mortgage loans which are eligible for purchase by Fannie Mae, Freddie Mac and Ginnie Mae ("the agencies"). The pool may include FHA streamline mortgage loans or VA Interest Rate Reduction Refinancing Loan (IRRR) which may have limited valuation and documentation, by no more than 15% of the balance. The revolving pool has a total size of $400,000,000.
The complete rating action are as follows.
Issuer: Station Place Securitization Trust 2021-WL1
Cl. A, Assigned (P)Aaa (sf) Cl. B, Assigned (P)Aa2 (sf) Cl. C, Assigned (P)A2 (sf) Cl. D, Assigned (P)Baa2 (sf) Cl. E, Assigned (P)Baa3 (sf) Cl. F, Assigned (P)Baa3 (sf) RATINGS RATIONALE
The Station Place Securitization Trust 2021-WL1 transaction is backed by a revolving warehouse facility sponsored by Jefferies Funding LLC ("Jefferies Funding"). The facility's collateral will be newly-originated, first-lien, fixed rate and adjustable rate, residential mortgage loans eligible for purchase by the agencies. The transaction is based on a "back to back" repo structure. The underlying repurchase agreements are between each of the underlying sellers, and Jefferies Funding, as buyer. The securitization's repurchase agreement is between Jefferies Funding, as repo seller, and Station Place Securitization Trust 2021-WL1 as buyer. Jefferies Group LLC ("Jefferies Group", rated Baa3) guarantees Jefferies Funding's payment obligations under the securitization's repurchase agreement during the revolving period, which amounts will in turn be used to pay the notes in full in two years.
We base our Aaa expected losses of 30.66% and base case expected losses of 4.48% on a scenario in which Jefferies Funding and the repo guarantor do not pay the aggregate repurchase price to pay off the notes at the end of the facility's two-year revolving term, and the repayment of the notes will depend on the credit performance of the remaining static pool of mortgage loans. To assess the credit quality of the static pool, we created a hypothetical adverse pool based on the facility's eligibility criteria, which includes no more than 25% (by unpaid balance) adjustable-rate mortgage (ARM) loans. We analyzed the pool using our US MILAN model and made additional pool level adjustments to account for risks related to (i) a weak representation and warranty enforcement framework (ii) a high level of compliance findings related to the TILA-RESPA Integrated Disclosure (TRID) Rule in third-party diligence reports from prior warehouse securitizations, which have raised concerns about potential losses owing to TRID for the loans in this transaction and (iii) risks related to homeowners association (HOA) properties in super lien states.
The ratings on the notes are the higher of (i) the repo guarantor Jefferies Group LLC's financial strength rating (Baa3) and (ii) the rating of the notes based on the credit quality of the mortgage loans backing the notes (i.e., absent consideration of the repo guarantor). If the repo guarantor does not satisfy its obligations under the guaranty, then the ratings on the notes will only reflect the credit quality of the mortgage loans backing the notes.
The mortgage loans will be newly originated, first-lien, fixed-rate and adjustable rate mortgage loans that also comply with the eligibility criteria set forth in the master repurchase agreement. The aggregate principal balance of the purchased loans at closing will be $400,000,000. Per the transaction documents, the mortgage pool will have a minimum weighted average FICO of 715 and a maximum weighted average LTV of 85%.
The ultimate composition of the pool of mortgage loans remaining in the facility at the end of the two-year term upon default of Jefferies Funding is unknown. We modeled this risk through evaluating the credit risk of an adverse pool constructed using the eligibility criteria. In generating the adverse pool: 1) We assumed the worst numerical value from the criteria range for each loan characteristic. For example, the credit score of the loans is not less than 620 and the weighted average credit score of the purchased mortgage loans is not less than 715; the maximum debt-to-income ratio is 55% in the adverse pool (per eligibility criteria); 2) We assumed risk layering for the loans in the pool within the eligibility criteria. For example, loans with the highest LTV also had the lowest FICO to the extent permitted by the eligibility criteria; 3) We took into account the specified restrictions in the eligibility criteria such as the weighted average LTV and FICO; 4) Since these loans are eligible for purchase by the agencies, we also took into account the specified restrictions in the underwriting criteria. For example, no more than 97% LTV for fixed rate purchased loans and 95% for adjustable rate purchase loans; and 5) we also took into account any restrictions on loans originated/serviced by particular sellers. For example, Movement Mortgage, LLC cannot service more than 10% of the pool (by balance).
The mortgage loans may be originated by any of the following underlying sellers - Homebridge Financial Services, Inc., loanDepot.com, LLC, Nationstar Mortgage, LLC, Plaza Home Mortgage, Inc., Movement Mortgage, LLC, PMT Lending, LLC, Provident Asset Management, Provident Funding Associates, L.P., Quicken Loans, LLC and United Shore Financial Services, LLC. All underlying sellers are approved sellers and servicers by the agencies. We reviewed the seller approval and monitoring process along with risk management practices of Jefferies. We also considered Jefferies assessment (including their perceived risk) of the underlying sellers in our analysis.
The underlying sellers will service the loans and U.S. Bank National Association will be the standby servicer. At the transaction closing date, the underlying servicers will sign an acknowledgment, which will provide that they are servicing the purchased loans for the joint benefit of Station Place Securitization Trust 2021-WL1 and the indenture trustee.
Our analysis of the securitization structure includes reviewing bankruptcy remoteness, assessing the ability of the indenture trustee to take possession of the collateral in an event of default, conformity of the collateral with the eligibility criteria as well as allocation of funds to the notes.
The transaction is structured with back-to-back repo agreements whereby Jefferies Funding as the buyer will acquire the eligible mortgage loans pursuant to underlying repurchase agreements with the underlying sellers. The underlying repurchase agreements permit Jefferies Funding to re-hypothecate the eligible mortgage loans and within the underlying repurchase agreements, the underlying sellers have acknowledged Jefferies Funding's right to enter into financing transactions such as those contemplated by the Station Place master repurchase agreement and the indenture. Under the master repurchase agreement, Jefferies Funding, the repo seller, will repurchase the purchased mortgage loans on the repurchase date. The underlying sellers will then repurchase such mortgage loans from Jefferies Funding at their respective repurchase price.
The U.S. Bankruptcy Code provides repurchase agreements, security contracts and master netting agreements a "safe harbor" from the Bankruptcy Code automatic stay. Due to this safe harbor, in the event of a bankruptcy of Jefferies Funding, the issuer will be exempt from the automatic stay and thus, the issuer will be able to exercise remedies under the master repurchase agreement, which includes seizing the collateral.
During the revolving period, the repo seller's obligations will include making timely payments of interest accrued on the notes as well as the aggregate monthly fees. Failure to make such payments will constitute a repo trigger event whereby the indenture trustee will seize the collateral and terminate the repo agreement. It is expected that the notes will not receive payments of principal until the expected maturity date or after the occurrence and continuance of an event of default under the indenture unless the repo seller makes an optional prepayment. In an event of default, principal will be distributed sequentially amongst the classes. Realized losses will be allocated in a reverse sequential order.
In addition, since the pool may consist of both fixed rate and adjustable rate mortgages, the transaction may be exposed to potential risk from interest rate mismatch. To account for the mismatch, we assumed a stressed LIBOR curve by increasing the one-month LIBOR rate incrementally for a certain period until it reaches the maximum allowable interest rate as described in the transaction documents.
Ongoing Due Diligence
During the revolving period, Clayton Services LLC will conduct ongoing due diligence on 100 randomly selected loans. The first review will be performed 30 days following the closing date while the periodic review will be conducted every 180 days after the closing date. The scope of the review will include credit underwriting, regulatory compliance, valuation and data integrity.
Because Moody's analysis is based on a scenario in which the facility terms out, due diligence reviews provide some control on the credit quality of the collateral. The due diligence framework in this transaction combined with the collateral eligibility controls help mitigate the risks of adverse selection in this transaction.
While the due diligence review will provide some validation on the quality of the loans, it may not be fully representative of the collateral quality of the facility at all times. This is mainly due to the frequency of the due diligence review, the revolving nature of the collateral pool, and that the review will be conducted on a sample basis. Also, by the time the due diligence review is completed, some of the sampled loans may no longer be in the pool.
Representation and Warranties
For a mortgage loan to qualify as an eligible mortgage loan, the loan must meet representations and warranties described in the repurchase agreement. The substance of the representations and warranties are consistent with those in our published criteria for representations and warranties for U.S. RMBS transactions. After a repo event of default, which includes the repo seller or buyer's failure to purchase or repurchase mortgage loans from the facility, the repo seller or buyer's failure to perform its obligations or comply with stipulations in the master repurchase agreement, bankruptcy or insolvency of the buyer or the repo seller, any breach of covenant or agreement that is not cured within the required period of time, as well as the repo seller's failure to pay price differential when due and payable pursuant to the master repurchase agreement, a delinquent loan reviewer will conduct a review of loans that are more than 120 days delinquent to identify any breaches of the representations and warranties provided by the underlying sellers. Loans that breach the representations and warranties will be put back to the repo seller for repurchase.
While the transaction has the above described representation and warranties enforcement mechanism, in the amortization period, after an event of default where the repo seller did not pay the notes in full, it is unlikely that the repo seller will repurchase the loans. In addition, the noteholders (holding 100% of the aggregate principal amount of all notes) may waive the requirement to appoint such delinquent loan reviewer.
Elevated social risks associated with the COVID-19
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 regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
We have not made any adjustments related to coronavirus for this transaction because (i) loans that are subject to payment forbearance or a trial modification are ineligible to enter the facility, and the repo seller must repurchase loans in the facility that become subject to forbearance, (ii) delinquent loans are ineligible to enter the facility, and (iii) loans are unlikely to be modified while in the facility due to the seasoning constraint specified in the eligibility criteria. The repo seller will be required to repurchase any loans that do not meet the "eligible loan" criteria.
Factors that would lead to an upgrade or downgrade of the ratings:
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 the state of the housing market.
Levels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above our original expectations as a result of a weaker collateral composition than that in the adverse pool, financial distress of any of the counterparties. Transaction performance also depends greatly on the US macro economy and housing market.
The methodologies used in these ratings were "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in April 2020 and available at https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1201303 and "Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts" published in May 2017 and available at https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1068154. 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_1260495.
In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.
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.
Vincent Lai Associate Lead 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 Sang Shin VP - Sr Credit Officer/Manager 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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