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Structured Agency Credit Risk (STACR) Debt Notes, Series 2017-HQA3 -- Moody's upgrades 39 classes of credit risk transfer (CRT) RMBS issued by Freddie Mac

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Rating Action: Moody's upgrades 39 classes of credit risk transfer (CRT) RMBS issued by Freddie MacGlobal Credit Research - 19 Feb 2021Toronto, February 19, 2021 -- Moody's Investors Service, ("Moody's") has upgraded the ratings of 39 tranches from five transactions issued by Freddie Mac between 2015 and 2017.These five transactions are actual loss credit risk transfer (CRT) transaction. Additionally, Structured Agency Credit Risk (STACR) Debt Notes, Series 2017-HQA1 and Structured Agency Credit Risk (STACR) Debt Notes, Series 2017-HQA3 are high-LTV transactions that benefit from mortgage insurance (MI).Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL440917 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer. The link also contains the associated underlying collateral losses.The complete rating actions are as follows:Issuer: STACR 2017-HQA1Cl. M-2A, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AR, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AS, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AT, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AI*, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AU, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2R, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2S, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2T, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2U, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2I*, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Issuer: Structured Agency Credit Risk (STACR) Debt Notes, Series 2015-DNA1Cl. M-3, Upgraded to Aa2 (sf); previously on Mar 13, 2019 Upgraded to Aa3 (sf)Cl. M-3F, Upgraded to Aa2 (sf); previously on Mar 13, 2019 Upgraded to Aa3 (sf)Cl. M-3I*, Upgraded to Aa2 (sf); previously on Mar 13, 2019 Upgraded to Aa3 (sf)Issuer: Structured Agency Credit Risk (STACR) Debt Notes, Series 2015-DNA2Cl. M-3, Upgraded to Aa3 (sf); previously on Jun 13, 2019 Upgraded to A1 (sf)Cl. M-3F, Upgraded to Aa3 (sf); previously on Jun 13, 2019 Upgraded to A1 (sf)Cl. M-3I*, Upgraded to Aa3 (sf); previously on Jun 13, 2019 Upgraded to A1 (sf)Issuer: Structured Agency Credit Risk (STACR) Debt Notes, Series 2016-DNA1Cl. M-3, Upgraded to A3 (sf); previously on Jan 25, 2019 Upgraded to Baa1 (sf)Cl. M-3F, Upgraded to A3 (sf); previously on Jan 25, 2019 Upgraded to Baa1 (sf)Cl. M-3I*, Upgraded to A3 (sf); previously on Jan 25, 2019 Upgraded to Baa1 (sf)Issuer: Structured Agency Credit Risk (STACR) Debt Notes, Series 2017-HQA3Cl. M-2A, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AT, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AU, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AR, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2AS, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2B, Upgraded to Baa3 (sf); previously on Oct 30, 2019 Upgraded to Ba2 (sf)Cl. M-2, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2BR, Upgraded to Baa3 (sf); previously on Oct 30, 2019 Upgraded to Ba2 (sf)Cl. M-2BS, Upgraded to Baa3 (sf); previously on Oct 30, 2019 Upgraded to Ba2 (sf)Cl. M-2BT, Upgraded to Baa3 (sf); previously on Oct 30, 2019 Upgraded to Ba2 (sf)Cl. M-2BU, Upgraded to Baa3 (sf); previously on Oct 30, 2019 Upgraded to Ba2 (sf)Cl. M-2R, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2S, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2T, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2U, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)Cl. M-2AI*, Upgraded to A1 (sf); previously on Oct 30, 2019 Upgraded to A3 (sf)Cl. M-2BI*, Upgraded to Baa3 (sf); previously on Oct 30, 2019 Upgraded to Ba2 (sf)Cl. M-2I*, Upgraded to Baa2 (sf); previously on Oct 30, 2019 Upgraded to Baa3 (sf)*Reflects Interest Only ClassesRATINGS RATIONALEToday's rating upgrades reflect the increased levels of credit enhancement available to the bonds, the recent performance, and Moody's updated loss expectations on the underlying pools. In these transactions, high prepayment rates, generally in the range of 30% - 50% over the past 6 months, driven by the low interest rate environment, have benefited the bonds by increasing the paydown and building credit enhancement. In addition, these transactions are structured with sequential principal distributions amongst the subordinate bonds.In our analysis we considered the additional risk posed by borrowers enrolled in payment relief programs. We increased our MILAN model-derived median expected losses by 15% and our Aaa losses by 5% to reflect the performance deterioration resulting from a slowdown in US economic activity due to the COVID-19 outbreak. For transactions with more than 4% exposure to loans that are on payment relief and have not been cash-flowing for over three months, we further increased the median expected losses for the respective pools. This loss increase was based on the assumption that 50% of such loans will incur a deferral of the missed payments or a modification to the loan terms. As loans remain enrolled in the payment relief programs for extended periods of time, it will become harder for such borrowers to make up all such missed payments and become current. As of November 2020, STACR 2017-HQA1 and STACR 2017-HQA3 have more than 4% exposure to such loans.We identified loans granted payment relief based on a review of loan level cashflows over the last few months. In our analysis, we considered loans that: (1) were not liquidated but took a loss in the reporting period (to capture loans with monthly deferrals that were reported as current) or (2) have actual balances that increased or were unchanged in the reporting period, excluding interest-only loans and pay-ahead loans, to be loans under a payment relief program. Based on our analysis, the proportion of borrowers in these GSE pools that are enrolled in payment relief plans ranged between 5% to 8% as of November 2020.In response to the COVID-19-spurred economic shock, the GSEs have enacted temporary policies that allow servicers to offer payment forbearance to borrowers impacted by COVID-19. The GSEs report these loans that are granted forbearance as delinquent for purposes of CRT transactions despite suspension of reporting borrowers to the credit bureaus. Additionally, delinquencies caused by COVID-19 qualify for "natural disaster" treatment, and these transactions provide a grace period for such loans before they are recognized as Credit Event Reference Obligation (when the loans become 180 day or more delinquent). These CRT transactions allocate losses based on actual losses incurred upon liquidation of defaulted mortgage loans in the reference pool (i.e., "actual loss" transaction) and these losses are allocated to bondholders, reverse sequentially.The delinquencies underlying the pools have risen due to impact of the pandemic and range between 2% to 6% as of November 2020. This has resulted in the deals failing their performance triggers, thus slowing down the amortization on the sequential pay bonds. Despite the recent slowdown in payment, the bonds have benefited from sustained prepayment and increases in credit enhancement.Our updated loss expectations on the pools incorporate, amongst other factors, our assessment of the due diligence findings of the third-party reviews received at the time of issuance.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.- Principal MethodologiesThe 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. In addition, Moody's publishes a weekly summary of structured finance credit ratings and methodologies, available to all registered users of our website, www.moodys.com/SFQuickCheck.Factors that would lead to an upgrade or downgrade of the ratings:UpLevels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings of the subordinate bonds 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.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 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.Finally, performance of RMBS continues to remain highly dependent on servicer procedures. Any change resulting from servicing transfers or other policy or regulatory change can impact the performance of these transactions.An IO bond may be upgraded or downgraded, within the constraints and provisions of the IO methodology, based on lower or higher realized and expected loss due to an overall improvement or decline in the credit quality of the reference bonds.For more information please see www.moodys.com.REGULATORY DISCLOSURESThe List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_ARFTL440917 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:** Rating Solicitation** Issuer Participation** Participation: Access to Management** Participation: Access to Internal Documents ** Disclosure to Rated Entity ** Endorsement ** Lead Analyst ** Releasing Office 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.Moody's either did not receive or take into account one or more third-party due diligence assessment(s) regarding the underlying assets or financial instruments (the "Due Diligence Assessment(s)") in this credit rating action.The Due Diligence Assessment(s) referenced herein were prepared and produced solely by parties other than Moody's. While Moody's uses Due Diligence Assessment(s) only to the extent that Moody's believes them to be reliable for purposes of the intended use, Moody's does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment(s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment(s).The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each 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.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.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. Siddharth Lal Analyst Structured Finance Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Soumya Vasudevan Vice President - Senior Analyst Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. 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