NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating and Rating Outlook to JPMorgan Chase Bank's second risk transfer transaction J.P. Morgan Madison Avenue Securities Trust, L Street Securities Series 2015-CH1:
--$36,213,000 class M-1 notes 'BBB-sf'; Outlook Stable.
The $1,864,490,004 class A-H reference tranche, $56,766,817 class M-2 and $1,957,766,817 notional amount class X-IO certificates will not be rated by Fitch.
The 'BBB-sf' rating on the class M-1 notes reflects the 2.90% subordination provided by the class M-2 certificates. J.P. Morgan Madison Avenue Securities Trust, L Street Securities Series 2015-CH1 is JPMorgan Chase Bank N.A.'s (JPMCB) second risk transfer transaction, which is similar to Fannie Mae's Connecticut Avenue Securities (CAS) program where the objective is for private investors to share credit risk with Fannie Mae.
The transaction will be issued by J.P. Morgan Madison Avenue Securities Trust, L Street Securities Series 2015-CH1 and will simulate the behaviour of a $1.957 billion pool of JPMCB originated mortgage loans. There are several key differences between this transaction and CAS, most notably the issuance of the bonds from a special purpose trust whose security interest consists of the cash collateral account (CCA), an interest account, a retained interest-only (IO) strip of 28.5 bps off of the collateral balance and a reserve account, all which will be used to pay principal and interest on the notes.
The issuer will acquire the mortgage loans from JPMCB and simultaneously sell the mortgage loans to Fannie Mae to be held in a newly issued Fannie Mae Guaranteed MBS. The issuer will retain an IO strip off the mortgage pool (retained IO strip) and will issue the class M-1 notes, class M-2 certificates, (together the class M securities) and class X-IO certificates. Payments to the class M-2 certificates and X-IO certificates are subordinated to the class M-1 notes.
Proceeds from the sale of the class M notes will be deposited in the CCA. Payments to the M-1 notes will be paid from amounts on deposit in the CCA, interest account, and reserve account. Amounts received from the retained IO strip will be deposited in the interest account to pay interest to the class M securities.
Payments will be made to Fannie Mae from the CCA with respect to mortgage loans that become 180 days or more delinquent or as to which certain other recourse events occur. The issuer will make payments to Fannie Mae for recourse events, based on the loan balance at the time multiplied by the fixed loss severity (LS). The total recourse obligation to Fannie Mae payable by the issuer will initially equal 4.75% of the mortgage pool balance.
The notes and certificates will be subject to the performance of the mortgage loans originated by JPMCB and sold to Fannie Mae and, as such, are intended to simulate the repayment behaviour and credit risk of private-label (PL) U.S. RMBS bonds. The M-1 notes will be issued as LIBOR-based floaters, subject to an available funds cap, and will carry a 10-year legal final maturity.
KEY RATING DRIVERS
High-Quality Mortgage Pool: The collateral pool consists of prime-quality, 30-year, fully amortizing and fully documented fixed-rate mortgages (FRMs) to borrowers with strong credit profiles and low leverage. The pool is also geographically diverse.
Above-Average Agency Originator: Based on its review of JPMCB's origination platform for agency loans, Fitch believes that JPMCB has strong processes and procedures in place and views its ability to originate high-quality agency loans as above average. Fitch also reviewed JPMCB's loan-level quality control (QC) processes for agency loans and found them to be robust.
Loans Subject to Fannie Mae's QC: The mortgage pool consists of loans delivered to Fannie Mae in exchange for a guaranteed MBS, which will initially be retained by JPMCB. As a result, the loans will be subject to Fannie Mae's loan QC review process. JPMCB is obligated to repurchase mortgage loans for which a deficiency is identified by Fannie Mae or deemed ineligible based on Fannie Mae's selling guide or other agreements. Fitch rates JPMCB 'AA-/F1+'/Outlook Stable, which as the party making the reps with respect to the mortgage loans, is supportive of the rating of class M-1 notes.
Limited Counterparty Exposure: Principal will be paid to the M-1 notes from amounts on deposit in the CCA, which will be established by the issuer, J.P. Morgan Madison Avenue Securities Trust, L Street Securities Series 2015-CH1 (JPMMA 2015-1). The initial balance of the CCA will equal the initial unpaid principal balance (UPB) of class M-1 notes and M-2 certificates (together, the class M securities) and will be invested in eligible investments. The CCA will be pledged to secure recourse payments to Fannie Mae up to a recourse obligation of 4.75% of the initial mortgage pool balance. Funds will be available to pay principal payments on the class M securities sequentially, to the extent available after recourse event payments are made to Fannie Mae.
Limited Risk Retention: Unlike the CAS transactions where Fannie Mae retains the first loss class and a vertical slice of the class M securities, Fannie Mae will only absorb losses once the 4.75% protection provided by the class M securities is depleted. While Fitch views more positively those transactions that more closely align the interests of the subordinated noteholders with those of the senior holders, there is little incremental risk, if any, with this transaction, as Fitch expects Fannie Mae to maintain and enforce its policies non-discriminately across all its approved seller/servicers.
Available Funds Cap Structure: Interest due to class M-1 notes will be capped at amounts on deposit in the interest account, which will consist of amounts received from the retained IO strip of 28.5bps off the mortgage pool balance, investment earnings on the CCA and amounts on deposit in the reserve fund. The available funds cap reduces the risk of a rating downgrade on the M-1 notes in the unlikely event that funds on deposit in the interest account and retained IO strip are less than one month LIBOR plus M-1's margin. Fitch's cash flow analysis, together with the application of its 'BBB-' interest rate stress scenario, suggests that amounts received on the retained IO strip will be sufficient to pay one month LIBOR + 2.00% to the class M-1 notes through maturity.
Due Diligence Scope Limited: Due diligence was conducted on 1,169 loans, or approximately 15% of the mortgage pool, which is consistent with Fitch's criteria. All the loans were reviewed for credit, property valuation and compliance by a third-party diligence provider. However, the scope of the compliance review was limited to compliance with laws relating to assignee liability and those that limit points and fees and, therefore, was not consistent with Fitch criteria. However, Fitch conducted a review of JPMCB's compliance QC review process and found it to be thorough and comprehensive, which should reduce the risk of recourse events arising from material compliance violations.
Fixed Loss Severity: The transaction benefits from a fixed loss severity (LS) schedule tied to cumulative recourse events. If actual loan LS is above the set schedule, Fannie Mae absorbs the higher losses. Fitch views the fixed LS positively, as it reduces the uncertainty that may arise due to future changes in Fannie Mae's loss mitigation or loan modification policies. The fixed severity also offers investors greater protection against natural disaster events where properties are severely damaged, as well as in cases of limited or no recourse to insurance.
Advantageous Payment Priority: The payment priority of M-1 notes will result in a shorter life and more stable credit enhancement (CE) than for mezzanine classes in PL RMBS, providing a relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full pro-rata share of the pool's unscheduled principal payment until year 10, the M-1 notes can receive a full pro-rata share of unscheduled principal immediately, as long as a minimum CE level is maintained.
Additionally, unlike PL mezzanine classes, which lose subordination over time due to scheduled principal payments to more junior classes, the M-2 class will not receive any scheduled or unscheduled allocations until the M-1 classes are paid in full.
10-Year Maturity: M-1 notes benefit from a 10-year legal final maturity. As a result, any collateral losses on the mortgage pool that occur beyond year 10 are borne by Fannie Mae and do not affect the transaction. Fitch accounted for the 10-year hard maturity window in its default analysis and applied a reduction to its lifetime default expectations. The credit ranged from 8% at the 'Asf' rating category to 12% at the 'BBsf' rating category. A credit of 10.67% was applied at the 'BBB-sf' rating stress.
Special Hazard Leakage: Fitch believes the structure is vulnerable to special hazard risk, as there is no consideration for payment disruptions related to natural disaster events in the recourse event definition. As such, credit protection in the transaction may be eroded by natural disasters that may cause extended delinquencies (which may, in part, be allowed by disaster relief programs) but of which borrowers ultimately cure. Fitch considered this risk in its analysis, conducted sensitivity analysis and found, based on prior observed performance in post-natural disaster events (including Hurricane Katrina and the Northridge Earthquake), that the risk exposure is relatively low.
RATING SENSITIVITIES
Fitch's analysis incorporates sensitivity analyses to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at both the metropolitan statistical area (MSA) and national levels. The implied rating sensitivities are only an indication of some of the potential outcomes and do not consider other risk factors that the transaction may become exposed to or be considered in the surveillance of the transaction.
This defined stress sensitivity analysis demonstrates 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 23% at the 'BBB-sf' level. The analysis indicates that 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 11%, 7% and 30% would potentially reduce the 'BBB-sf' rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively.
DUE DILIGENCE USAGE
Fitch was provided with due diligence information from AMC Diligence, LLC. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. Fitch considered this information in its analysis and the findings did not have an impact on our analysis.
Additional information is available at www.fitchratings.com.
Sources of Information:
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 provided by JP Morgan Chase.
Applicable Criteria
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868
Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 09 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863276
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864368
U.S. RMBS Cash Flow Analysis Criteria (pub. 06 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863973
U.S. RMBS Loan Loss Model Criteria (pub. 03 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868923
U.S. RMBS Master Rating Criteria (pub. 12 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866607
U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 01 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866259
Related Research
L Street Securities, Series 2015-CH1 -- Appendix
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871202
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991569
ABS Due Diligence Form 15E 1
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991569
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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