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Fitch Reviews GSE Credit Risk During Forbearance

Fitch Ratings has taken various rating actions on 61 total classes and related exchangeable notes from 15 GSE Credit Risk Sharing (CRT) transactions issued between 2013 and 2015 and one private label CRT transaction issued in 2018. Fitch has placed seven classes on Rating Watch Negative (and six related exchangeable notes).

The transactions reviewed include eight Fannie Mae Connecticut Avenue Securities (CAS) transactions, seven Freddie Mac Structured Agency Credit Risk (STACR) transactions, and one PennyMac Credit Risk Transfer transaction. Payments on the notes are subject to the credit and principal payment risk of reference pools of certain prime agency residential mortgage loans held in various guaranteed MBS. All the transactions included in Fitch's review follow a set fixed severity schedule for loans that experience a credit event. The loss severity (LS) applied is predetermined and based on the percentage of loans in the reference pool that have already been marked as credit events. Both Fannie Mae and Freddie Mac transitioned from issuing a fixed LS schedule to actual loss in 2015.

The Rating Watch Negative and Outlook Negative actions reflect the large increase of loans on a forbearance plan due to the ongoing coronavirus pandemic. Borrowers on a forbearance plan are counted as delinquent until the missed payments are fully repaid or borrowers resume the monthly payment with the missed payments deferred as part of the resolution strategies announced by Fannie Mae and Freddie Mac.

Four CAS and two STACR fixed severity transactions in this review do not contain language addressing the treatment of loans in forbearance as a result of the coronavirus or any natural disasters or casualty events. As a result, loans to borrowers who are on a forbearance plan due to the coronavirus pandemic will be recognized as a credit event once they are 180 days delinquent and cause write downs to the bonds. Transactions impacted by this treatment and placed on Rating Watch Negative include CAS 2013-C01, CAS 2014-C01, CAS 2014-C02, CAS 2014-C03, STACR 2013-DN2, STACR 2014-DN2. The Negative Watch reflects the additional credit events and permanent bond write downs expected due to the impact of the coronavirus pandemic.

For CAS 2015-C01, CAS 2015-C02, CAS 2015-C03, and L Street Securities 2017-PM1 fixed severity transactions, a reference obligation that was in a forbearance period due to a casualty event (such as a natural disaster, fire or theft) at the time it became a credit event reference obligation will become a reversed credit event reference obligation if the reference obligation has a payment status reported as current at the conclusion of its forbearance period (or up to three months thereafter if necessary). While the reversal of credit events lessens the impact of affected borrowers, the bonds are at risk of permanent interest shortfalls since the interest paid will be calculated off of the written down bond balance until the reference pool and bonds are written back up. The Outlook for transactions impacted by this treatment were revised to Negative rather than placed on Negative Watch since the bonds are better protected from the coronavirus pandemic related forbearance from a principal perspective than the earlier CAS fixed severity transactions without any casualty event language.

The later STACR fixed severity transactions STACR 2014-DN3, STACR 2014-DN4, STACR 2014-HQ1, STACR 2014-HQ2, STACR 2014-HQ3, STACR 2015-HQ2 contain provisions for loans on a forbearance plan as a result of natural disasters including the coronavirus. Affected borrowers have 18 months to bring a loan current before the loan is recognized as a credit event. Bonds in these transactions were all affirmed, and their Outlooks were unchanged.

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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