NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns the following ratings to J.P. Morgan Mortgage Trust 2014-2 (JPMMT 2014-2):
--$171,015,000 class 1-A-1 exchangeable certificates 'AAAsf'; Outlook Stable;
--$127,565,000 class 1-A-2 certificates 'AAAsf'; Outlook Stable;
--$43,450,000 class 1-A-3 exchangeable certificates 'AAAsf'; Outlook Stable;
--$23,700,000 class 1-A-4 certificates 'AAAsf'; Outlook Stable;
--$19,750,000 class 1-A-5 certificates 'AAAsf'; Outlook Stable;
--$171,015,000 class 1-A-6 exchangeable certificates 'AAAsf'; Outlook Stable;
--$171,015,000 class 1-X-1 notional certificates 'AAAsf'; Outlook Stable;
--$102,358,000 class 2-A-1 certificates 'AAAsf'; Outlook Stable;
--$102,358,000 class 2-A-2 exchangeable certificates 'AAAsf'; Outlook Stable;
--$102,358,000 class 2-A-3 exchangeable certificates 'AAAsf'; Outlook Stable;
--$102,358,000 class 2-X-1 notional certificates 'AAAsf'; Outlook Stable;
--$102,358,000 class 2-X-2 notional certificates 'AAAsf'; Outlook Stable;
--$13,517,000 class A-M certificates 'AAAsf'; Outlook Stable;
--$7,745,000 class B-1 certificates 'AAsf'; Outlook Stable;
--$3,493,000 class B-2 certificates 'Asf'; Outlook Stable;
--$2,582,000 class B-3 certificates 'BBBsf'; Outlook Stable;
--$1,215,000 class B-4 certificates 'BBsf'; Outlook Stable.
The 'AAAsf' rating on the senior certificates reflects the 5.55% subordination provided by the 2.55% class B-1, 1.15% class B-2, 0.85% class B-3, 0.40% class B-4 and 0.60% class B-5. The $1,823,213 class B-5 certificates will not be rated by Fitch.
Fitch's ratings reflect the high quality of the underlying collateral, the clear capital structure and the high percentage of loans reviewed by third party due diligence companies. In addition, Wells Fargo Bank, N.A. will act as the master servicer and U.S. Bank Trust N.A. will act as the trustee for the transaction. For federal income tax purposes, elections will be made to treat the trust as one or more real estate mortgage investment conduits (REMICs).
This transaction includes the use of Pentalpha Surveillance LLC (Pentalpha) as representation & warranties (R&W) breach reviewer for the benefit of the trust. The securities administrator will instruct Pentalpha to review any loan that satisfies the review trigger. Pentalpha will review the loan using the breach determination review procedures outlined in the transaction documents to identify failures with respect to one or more of the breach determination procedures. If a failure exists, Pentalpha will determine whether or not the failure is material, based on materiality conditions outlined in the transaction documents. Pentalpha will then provide the final results of its review and determination to the securities administrator.
JPMMT 2014-2 will be J.P. Morgan Mortgage Acquisition Corp.'s second transaction of prime residential mortgages in 2014. The certificates are supported by a pool of prime 15-year fixed-rate fully amortizing mortgage loans. The aggregate pool included loans originated from First Republic Bank (55.1%), J.P. Morgan Chase Bank (38.2%) and other various mortgage lending institutions, each of which contributed less than 5% to the transaction.
As of the cut-off date, the aggregate pool consisted of 544 loans with a total balance of $303,748,213; an average balance of $558,361; a weighted average original combined loan-to-value ratio (CLTV) of 63.7%, and a weighted average coupon (WAC) of 3.7%. Rate/Term and cash out refinances account for 33.5% and 38% of the loans, respectively. The weighted average original FICO credit score of the pool is 767. Owner-occupied properties comprise 62.9% of the loans. The states that represent the largest geographic concentration are California (49%), New York (10.8%) and Texas (7.5%).
KEY RATING DRIVERS
Borrower Concentration Risk: Approximately 12% of the pool consists of borrowers with more than one mortgage loan, half of which have more than two mortgage loans in the subject pool. The two highest borrower exposures have 10 and 11 loans in the pool and account for 1% and 1.7%, respectively. Due to the considerable borrower exposure, additional deterministic tests were performed and are reflected in Fitch's expected loss levels.
Exclusive 15-Year Mortgages: The collateral pool consists of 15-year fixed-rate mortgages (FRMs) to borrowers with very strong credit profiles, low leverage and substantial liquid reserves. Third-party loan-level due diligence was performed on 100% of the pool, and Fitch believes the results of the review generally indicate strong underwriting controls. Fitch's probability of default (PD) for 15-year FRMs is lower than that for loans with 30-year terms to reflect the positive selection associated with borrowers who select the higher payment, which results in faster amortization.
High Geographic Concentration: The pool's primary concentration risk is California, where 49% of the properties are located. In addition, 57% of the properties are located in the pool's top five metropolitan statistical areas (MSA) in California, New York and Illinois. The pool has significant regional concentrations, which resulted in an additional penalty of approximately 16% to the pool's lifetime default expectation.
Extraordinary Expense Adjustment: Extraordinary expenses will be taken out of available funds but not accounted for in the contractual interest owed to the bondholders. This construct can result in principal and interest shortfalls to the bonds starting from the bottom of the capital structure. To account for this risk, Fitch adjusted the credit enhancement (CE) upward by 25 bps for the class A bonds, 20 bps for classes B-1 and B2 and 10 bps for classes B-3 and B-4.
Nonfull Representation and Warranty Framework: While the transaction benefits from JPMCB (rated 'A+'/'F1'; Stable Outlook) and FRB (rated 'A-'/'F1'; Stable Outlook) as representation and warranty (rep and warranty) providers for approximately 93% of the pool, Fitch believes the value of the rep and warranty framework is diluted by the presence of qualifying and conditional language in conjunction with sunset provisions, which reduces lender breach liability. While the agency believes the high credit quality pool and clean diligence results mitigate these risks, Fitch considered the weaker framework in its analysis.
Market Value Decline Sensitivity: Fitch considered further market value decline (MVD) sensitivities, in addition to those generated by its sustainable home price (SHP) model. These scenarios aligned Fitch's 'Asf' sustainable MVD (sMVD) assumptions with peak-to-trough MVDs experienced during the housing crisis through 2009. The sensitivity analysis, which was factored into Fitch's loss expectations, resulted in applying an sMVD of 16% from 19% in its base case analysis.
RATING SENSITIVITIES
After Fitch determines credit ratings through a rating stress scenario analysis, additional sensitivity analyses are considered. The analyses provide a defined stress sensitivity to demonstrate how the ratings would react to steeper MVDs than that assumed at issuance as well as a defined sensitivity that demonstrates the stress assumptions required to reduce a rating by one full category, to non-investment grade, and to CCCsf'.
In its analysis, Fitch considered additional sMVD stress assumptions to those generated by the SHP model. These supplementary scenarios reflected base case sMVDs that aligned Fitch's 'Asf' sMVD stress assumptions with peak-to-trough MVDs experienced in the U.S. during the recent financial crisis (2007 - 2009). This is consistent with Fitch's view as described in its U.S. RMBS Loan Loss Model Criteria (dated December 2013, available on its website at www.fitchratings.com) which associates the recent national housing recession and related performance observations with an 'Asf' stress. The result of this sensitivity analysis was included in the consideration of the loss expectations for this transaction. The sensitivity analysis resulted in a base sMVD of 16%, compared with the model projected 19%.
Another sensitivity analysis was focused on determining how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10%, 20%, and 30%, in addition to the model projected 19% for this pool. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.
Fitch also conducted defined rating sensitivities, which determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'. For example, additional MVDs of 5%, 23% and 42% would potentially reduce the 'AAAsf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively.
Additional detail on the transaction is described in the pre-sale report 'J.P. Morgan Mortgage Trust 2014-2' published June 2014.
Additional information is available at 'www.fitchratings.com'.
In addition to the information sources identified in Fitch's criteria listed below, Fitch's analysis incorporated data tapes, due diligence results, deal structure and legal documents from the 17g5 website available on 'www.structuredfn.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 2014);
--Counterparty Criteria for Structured Finance and Covered Bonds (May 2014);
--Criteria for Interest Rate Stresses in Structured Finance Transactions (Jan. 2014);
--'U.S. RMBS Rating Criteria' (July 2013);
--'U.S. RMBS Loan Loss Model Criteria' (December 2013);
--U.S. RMBS Cash Flow Analysis Criteria (April 2014);
--U.S. RMBS Originator Review and Third-Party Due Diligence Criteria (April 2013);
--U.S. Residential Mortgage Loan Representations and Warranties Criteria (Jun. 2013);
--Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (January 2014);
--U.S. RMBS Surveillance Criteria (October 2013).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836981
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