Presale:
New Residential Mortgage Loan Trust 2016-1 Primary Credit Analyst: Joseph P Speziale, New York (212) 438-5653;
[email protected] Secondary Contact: Ashish Sharda, New York (1) 212-438-2565;
[email protected] Surveillance Credit Analyst: Ricky Johnson, New York (212) 438-0579;
[email protected]
Table Of Contents $246.432 Million Rated Mortgage-Backed Notes Series 2016-1 Rationale Transaction Structure Collateral Summary Strengths And Weaknesses Credit Analysis And Assumptions Structural Features Geographic Concentration Large Loans And Tail Risk Considerations Mortgage Originator/Aggregator Review Third-Party Due Diligence Review
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Table Of Contents (cont.) Representations And Warranties (R&Ws) Cash Flow And Scenario Analysis Related Criteria And Research
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Presale:
New Residential Mortgage Loan Trust 2016-1 $246.432 Million Rated Mortgage-Backed Notes Series 2016-1 This presale report is based on information as of March 29, 2016. The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings.
Preliminary Ratings As Of March 29, 2016 Preliminary amount (Mil. $)
Expected interest rate (%) (ii)
212.927
3.75
Class
Preliminary rating (i)
Credit enhancement (%) (iii) Class type
A-1
AAA (sf)
A-IO
AAA (sf)
(iv)
1.77 (v)
B-1
AA (sf)
10.103
4.50
B1-IO
AA (sf)
(iv)
1.02 (vi)
B-2
A (sf)
7.545
4.80
B2-IO
A (sf)
(iv)
0.72 (vii)
N/A Subordinate/interest only/initial exchangeable
B-3
BBB (sf)
6.522
5.52 (viii)
7.30 Subordinate/sequential/initial exchangeable
B-4
BB+ (sf)
4.092
5.52 (viii)
5.70 Subordinate/sequential/initial exchangeable
B-5
B (sf)
5.243
5.52 (viii)
3.65 Subordinate/sequential/initial exchangeable
B-6
NR
9.336488
5.52 (viii)
0.00 Subordinate/sequential/initial exchangeable
A-2
AAA (sf)
209.730
3.75
A-3
AAA (sf)
3.197
3.75
A-4
AA (sf)
223.030
5.52 (viii)
A-5
AAA (sf)
191.570
3.75
A-6
AAA (sf)
21.357
3.75
A
AAA (sf)
212.927
5.52 (viii)
B
NR
42.841488
5.52 (viii)
FB
NR
5.247244
N/A
16.75 Senior/initial exchangeable N/A Senior/interest only/initial exchangeable 12.80 Subordinate/sequential/initial exchangeable N/A Subordinate/interest only/initial exchangeable 9.85 Subordinate/sequential/initial exchangeable
16.75 (ix) Super senior/exchangeable 16.75 Senior mezzanine/exchangeable 12.80 Senior/exchangeable 16.75 (ix) Super senior/exchangeable 16.75 Senior mezzanine/exchangeable 16.75 Senior/exchangeable 0.00 Subordinate/exchangeable 0.00 Principal only
(i) The ratings are preliminary and subject to change at any time. (ii) The notes are subject to their respective net WAC cap. (iii) As a percentage of the total scheduled balances as of the cut-off date. (iv) Notional amount. (v) The note's interest rate will be the excess, if any, of the net WAC over 3.75%. (vi) The note's interest rate will be the excess, if any, of the net WAC over 4.50%. (vii) The note's interest rate will be the excess, if any, of the net WAC over 4.80%. (viii) Net WAC. (ix) Credit support for the super senior notes will be higher than the listed amount. IO--Interest only. WAC--Weighted average coupon. NR--Not rated. N/A--Not applicable.
Profile Expected closing date
March 31, 2016
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Profile (cont.) Cut-off date
March 1, 2016
Expected first payment date
April 25, 2016
Final scheduled distribution date March 25, 2056 Total note amount (including the unrated classes)
$261.0 million, in aggregate
Collateral type
Highly seasoned, prime and non-prime first-lien fixed- and adjustable-rate residential mortgage loans secured primarily by single-family residential properties, condominiums, planned-unit developments, two- to four-family residential properties, and manufactured homes
Collateral
Residential mortgage loans
Credit enhancement
For each class of rated notes, subordination of the notes that are lower in the payment priority
Participants Issuer
New Residential Mortgage Loan Trust 2016-1, a Delaware statutory trust
Sponsor
New Residential Investment Corp.
Sellers and R&W providers
NRZ Sponsor V LLC and NRZ Sponsor VI LLC
Master servicer
Nationstar Mortgage LLC
Servicers
Ocwen Loan Servicing LLC (65.3%), Nationstar Mortgage LLC (25.9%), and PNC Mortgage, a division of PNC Bank N.A. (8.8%)
Depositor
New Residential Funding 2016-1 LLC
Owner trustee and paying agent
Citibank N.A.
Indenture trustee
Wilmington Trust N.A.
R&W--Representations and warranties.
Rationale The preliminary ratings assigned to the New Residential Mortgage Loan Trust 2016-1's (NRMLT 2016-1) mortgage-backed notes reflect our view of: • The credit enhancement provided, as well as the associated structural transaction mechanics; • The pool's collateral composition, which consists of highly seasoned, prime and non-prime, fixed- and adjustable-rate mortgages (ARMs), as described in the Collateral Summary section below; • The representation and warranty (R&W) framework; and • The ability and willingness of key transaction parties to perform their contractual obligations, and the likelihood that the parties could be replaced if needed.
Transaction Structure The charts show an overview of the transaction's structure and cash flows.
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Collateral Summary The majority of borrowers in the NRMLT 2016-1 transaction have credit scores that are generally consistent with the Alternative-A (Alt-A) product type, though 40.2% of the pool's borrowers have FICOs equal to or higher than the archetypical (725). The pool's typical borrower has an updated FICO score slightly lower than that of our archetypical prime pool. Our estimate of the pool's weighted average current combined loan-to-value (LTV) ratio is approximately 57% based on our estimates of the values of the properties in the pool (see the Property Valuations section below for a detailed description of our methodology). A majority of the loans in the pool are performing loans, with a subset of loans having either been modified or currently one payment delinquent using the Mortgage Bankers Assn. (MBA) methodology. The pool represents a subset of loans from clean-up calls (optional terminations) of 2001 through 2005 securitizations (see Table 1 for the list of underlying securitizations and number of loans included in NRMLT 2016-1). We believe there is no significant
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geographic concentration of loans in this pool (see "Updated Criteria For Evaluating Geographic Concentration In U.S. RMBS Mortgage Pools," published Nov. 16, 2012). Table 1
Pool Breakdown Underlying securitization trust
Loan count
MLMI 2005-HE2
322
RALI 2003-QS4
240
RALI 2002-QS6
189
RAMP 2002-RZ3
154
RALI 2002-QS3
129
RFMSI 2005-S1
120
RALI 2002-QS5
104
RALI 2002-QS14
95
RFMSI 2003-S17
89
RFMSI 2003-S19
78
GMACMLT 2003-J9
72
GMACMLT 2003-J7
67
RALI 2002-QS2
55
RALI 2001-QS16
49
CWALT 2003-10CB
6
CWALT 2003-12CB
6
CXHE 2003-C
2
CWALT 2003-11T1
1
CWALT 2002-7
1
SAS 2002-HF1
1
FHASI 2005-2
1
CWHL 2003-11
1
CWHL 2003-34
1
CWHL 2003-J10
1
CWL 2002-BC2
1
CWALT 2003-1T1
1
SASC 2003-7H
1
CWALT 2004-1T1
1
CWHL 2002-J5
1
Total
1,789
One hundred nine loans in the collateral pool have received principal forbearance modifications. The deferred balances on these loans (totaling $5.247 million) do not accrue interest. The unrated class FB notes receive the deferred portion of principal from these loans. The Class FB is the first note to receive writedowns if any of the 109 loans with deferred balances experience realized losses.
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Table 2
Collateral Characteristics NRMLT 2016-1
NRMLT 2014-3
NRMLT 2014-2
255.8
527.7
461.1
Closing pool balance (Mil. $) Closing loan count
Standard & Poor's archetypical prime pool (i)
1,789
3,719
2,364
143,000
141,900
195,000
WA original LTV (%)
74.0
70.0
70.4
75.0
WA original CLTV (%)
75.6
71.3
70.4
75.0
WA current CLTV (%)
57.0
52.8
57.8
75.0
WA FICO (ii)
693
701
709
725
Average loan balance ($)
WA current rate (%)
5.8
5.9
5.9
WA seasoning (months)
151
132
136
0 to 6
WA debt-to-income (ii)
36.0
36.0
36.0
36.0
Owner-occupied (%)
85.9
90.2
94.3
100
Single-family (including PUD) (%)
88.7
91.9
94.9
100.0
Fixed-rate (%)
100.0
94.2
92.0
97.2
Fixed-rate IO (%)
1.0
0.3
0.3
ARM (%)
3.5
4.4
2.4
ARM IO (%)
0.4
0.0
0.0
Purchase loan (%)
32.2
29.4
30.4
Cash-out refi (%)
34.0
32.8
18.8
Current (%)
92.0
95.7
96.0
8.0
4.3
4.0
30-day delinquent (MBA) (%)
100.0
100.0
'AAA' loss coverage (%)
13.00
9.00
8.00
7.50
'AAA' foreclosure frequency (%)
30.97
29.04
24.88
15.00
'AAA' loss severity (%)
41.98
30.99
32.15
50.00
'BBB' loss coverage (%)
6.25
4.50
3.75
1.50
'BBB' foreclosure frequency (%)
18.84
20.19
16.72
3.80
'BBB' loss severity (%)
33.17
22.28
22.43
40.00
1.00
1.00
1.00
1.00
Geo concentration factor (x)
(i) As defined in the Sept. 10, 2009, criteria article. (ii) WA FICO and WA debt-to-income reflect assumptions for missing or outdated information as described further below. WA--Weighted average. NRMLT--New Residential Mortgage Loan Trust. LTV--Loan-to-value. CLTV--Combined loan-to-value. IO--Interest-only. ARM--Adjustable-rate mortgage. PUD--Planned-unit development. MBA--Mortgage Bankers Assn. N/A--Not applicable.
Strengths And Weaknesses We believe that the following collateral characteristics strengthen the NRMLT 2016-1 transaction: • Seasoning of more than 10 years on all loans demonstrates the borrowers' ability and willingness to make payments. The current combined LTV (CLTV) ratio of 57% is low due to loan balance amortization, as well as applicable home price appreciation since origination. • The collateral pool is geographically diverse. • The senior class benefits from credit support floors, whereby the principal allocation to the subordinate classes falls
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to zero on any distribution date when the subordinate notes' aggregate balance is less than or equal to 3.10% of the original collateral balance or 16.75% of the current collateral balance. Each rated subordinate class also benefits from floor mechanisms. • Citibank N.A. ('A') is the owner trustee and paying agent and is responsible (to the extent determined recoverable) for advancing delinquent principal and interest to the trust if the master servicer is unable to make advances. We believe the following factors weaken the NRMLT 2016-1 transaction: • A portion (8.0%) of the loans in the pool are reported as currently 30 days delinquent on their principal and interest (P&I) payments using the MBA method (none are delinquent under the Office of Thrift Supervision [OTS] method). During our credit analysis, we increased our loss expectation for loans with current delinquencies under the MBA convention. • A portion (5.7%) of the loans in the pool were 90-plus days delinquent at some point during the 12 months before the cutoff date. We incorporated the payment history of these loans and their recently updated FICO scores into our analysis. Whereas we assess lower loss expectations for loans with significant seasoning, we do not give such benefits to loans that were 90-plus days delinquent in the past 12 months. • Approximately 24.5% of the loans in the pool have been modified since origination. Although these loans are highly seasoned, the borrowers have shown difficulties in meeting their past payment obligations, so we reduced or removed the seasoning credit. In doing so, we used the most recent loan modification date rather than the first payment date associated with loan origination. • We currently do not rate NRZ Sponsor V LLC or NRZ Sponsor VI LLC, the transaction's R&W providers. Each is a relatively new entity and does not have a track record of observed repurchasing. Although we believe that the risk of R&W claims are mitigated given the loans' seasoning, their performance during a stressful economic environment, and the level of regulatory due diligence performed, we increased our loss expectations at all rating categories by a factor of 1.10x to account for this risk. • Approximately 65.3% of the pool is serviced by Ocwen Loan Servicing LLC (Ocwen), which we rank below average. However, we believe the role of the master servicer, Nationstar Mortgage LLC (Nationstar), as a back-up and the significant collateral seasoning are sufficient mitigants to support the ratings on the notes.
Credit Analysis And Assumptions Our analysis of the NRMLT 2016-1 collateral pool considered a number of factors including certain loan-level characteristics. The details of our analysis are described below.
FICO scores Updated primary borrower FICO scores could not be obtained for roughly 4.0% of the pool (70 loans). For 46 of those loans that had demonstrated clean (no delinquencies) pay histories (per OTS method) for the past 24 months, we assumed an updated FICO in line with the pool non-zero weighted average (roughly 698). For the remaining 24 loans that did not have clean pay histories, we assumed a FICO score of 500. In addition, 22 re-performing loans had updated primary borrower FICO scores that were aged beyond the limits outlined in our criteria (60 days for re-performing loans). For these loans, we assumed a FICO score of 500.
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Property valuations To determine LTV ratios, we estimated property values for all of the loans in this transaction after analyzing valuations from three sources. First was the issuer-provided Home Data Index (HDI) values on each property in the collateral pool from Clear Capital, a data and appraisal products provider. HDI is a software-based product that provides indexed property valuations using Clear Capital's datasets. Second, we used the Federal Housing Finance Agency's House Price Index (HPI) to adjust the values on roughly 99% of the properties from their original full appraisal property values provided by the issuer. The HPI values extend through fourth-quarter 2014, and any increases are haircut by 50%. Third, at the issuer's request, Clear Capital provided Broker Price Opinions (BPOs) that were obtained within the past six months on 534 loans. When performing our analysis, we compared the HDI, adjusted HPI, and BPO values, if available, and concluded that, on average, the BPO values were the lowest while HDI values were the highest. Therefore, in our credit analysis of this collateral pool we used the approach of applying the HPI adjusted original valuation, unless a BPO was available for the property, in which case we used the lower of the HPI and BPO value. Overall, the BPO values were roughly 4% lower than the HPI values.
Reperforming loans Although the majority of loans in this pool are performing, 8.0% are reported as currently 30 days delinquent (using the MBA method) and 24.4% were modified. In addition, 5.7% of the loans in the pool were 90-plus days delinquent (per OTS method) at some point during the 12 months before the cutoff date. We analyzed these loans through our credit model and incorporated the payment history performance into our loss assessment. In particular, the loans currently 30 days delinquent were assessed with an increased foreclosure frequency adjustment, and loans that were 90+ days delinquent within the last 12 months were assessed using updated FICO scores and the removal of seasoning credit. Seasoning credit was also adjusted (either removed or reduced) for any loans that had been modified since origination to give credit only from the time of the most recent modification date.
Documentation types Given the significant seasoning of the pool, the loans' original documentation type generally did not have an impact on our analysis. However, an adjustment of roughly 1.10x was applied to loss coverage on loans that were 90+ days delinquent in the past 12 months or modified since origination for lack of use of IRS form 4506-T to verify income and lack of verified deposit money (for purchase loans only).
Debt-to-income (DTI) All but four loans in the pool lacked DTI. Due to the high seasoning of the loans, we used an archetypical DTI of 36 for all loans that lacked DTI.
Deferred principal amounts Of the loans in the pool, 109 have non-interest-bearing deferred principal amounts that are not due until the interest-bearing portion of the loan has been paid through scheduled amortization, prepayment, or liquidation of the property. The deferred principal amounts total $5.247 million (approximately $48,200 per outstanding loan with deferred principal amounts). This amount is much like a second lien and reduces the effective borrower equity in the home. As such, we believe it will affect the borrower's willingness to pay, and we considered it in our foreclosure frequency analysis. Deferred principal amounts are subordinated to interest-bearing principal with respect to
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recoveries on the loan in an event of default, so we did not consider them in our loss severity analysis.
Outstanding corporate and escrow (C&E) advances A small portion of loans had outstanding C&E advances in which the servicer advanced delinquent payments of taxes and insurance and other expenses. Since these amounts would be owed to the servicer upon the loan's liquidation before proceeds are passed through to the trust, they were included in the loan balance when determining loss coverage. The end result was a marginal increase to our loss coverage projections.
Foreign nationals No evidence was provided that there were any foreign nationals in the pool. Furthermore, the strong performance of the loans in a stressed period suggests the risk of any foreign nationals failing to meet their loan obligations under stress is not material. Therefore, no additional adjustment to loss coverage was applied.
Structural Features This transaction has a typical shifting-interest structure with a five-year lockout period. The subordinate classes are available as credit support for the more senior classes as long as they are outstanding. The paying agent will make monthly distributions from the available distribution amount (see Table 3), which includes all funds that the servicer collects from the borrowers (excluding servicing, indenture trustee, paying agent, custodian, and master servicing fees, but including insurance and liquidation proceeds, subsequent recoveries, prepayment interest shortfalls received from the servicer or master servicer, and repurchase amounts) minus the reimbursement of servicer advances allowed under the servicing agreement terms and extraordinary expense payments and servicer and master servicer transfer costs), which are generally subject to a $250,000 annual cap except following an event of default per the indenture or servicing transfers in which case extraordinary expenses are uncapped. The Imputed Promises Analysis section describes how we applied stresses to extraordinary expenses to account for the potential of uncapped fees. See "Interest stresses" in the Cash Flow And Scenario Analysis section below for details on applying extraordinary expenses. Table 3
Payment Waterfall Priority
Payment (iii)
1
Interest and unpaid interest shortfalls, pro rata, to classes A-1 and A-IO
2
The senior principal distribution amount (i) to class A-1
3
Interest and unpaid interest shortfalls, pro rata, to classes B-1 and B1-IO
4
Class B-1's percentage of the subordinate principal distribution amount (ii) to class B-1
5
Interest and unpaid interest shortfalls, pro rata, to classes B-2 and B2-IO
6
Class B-2's percentage of the subordinate principal distribution amount (ii) to class B-2
7
Interest and unpaid interest shortfalls to the class B-3 notes
8
Class B-3's percentage of the subordinate principal distribution amount (ii) to class B-3
9
Interest and unpaid interest shortfalls to the class B-4 notes.
10
Class B-4's percentage of the subordinate principal distribution amount (ii) to class B-4
11
Interest and unpaid interest shortfalls to the class B-5 notes
12
Class B-5's percentage of the subordinate principal distribution amount (ii) to class B-5
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Table 3
Payment Waterfall (cont.) Priority
Payment (iii)
13
Interest and unpaid interest shortfalls to the class B-6 notes
14
Class B-6's percentage of the subordinate principal distribution amount (ii) to class B-6
15
Unpaid trust expenses is excess of the annual cap
16
Any remainder to the residual noteholder
(i) The senior principal distribution amount is generally the senior percentage of the scheduled principal amounts on the mortgage loans plus the senior prepayment percentage of unscheduled principal collections on the mortgage loans. (ii) The subordinate principal distribution amount is the subordinate percentage (100% minus the senior percentage) of the scheduled principal amounts on the mortgage loans plus the subordinate prepayment percentage (100% minus the senior prepayment percentage) of the unscheduled principal collections on the mortgage loans, if applicable. (iii) Exchangeables that were exchanged for initial exchangeables shall be entitled to a proportionate share of the interest or principal payments otherwise allocated to the initial exchangeables.
The senior notes comprise the class A-1, A-IO, A-2, A-3, A-4, A-5, A-6, and A notes. A-1 and A-IO are initial exchangeable notes, and the remaining senior notes serve as exchangeable notes. Holders of the initial exchangeable classes can exchange them for several combinations of exchangeable notes as specified in the offering documents. If an exchange is made, the exchanged note will receive a proportionate share of the interest and principal payments otherwise allocable to the classes of initial exchangeable notes. The subordinate initial exchangeable notes comprise the class B-1, B1-IO, B-2, B2-IO, B-3, B-4, B-5, and the unrated B-6 notes. All subordinate initial exchangeable notes can be exchanged for the unrated B note. The senior percentage of scheduled principal collections and, for the first five years, 100% of unscheduled principal collections on the mortgage loans will be allocated to the senior notes (excluding the interest-only notes). After five years, the portion of unscheduled principal collections allocated to the senior notes (excluding interest-only notes) gradually reduces (see Table 4). Table 4
Senior Prepayment Principal Distributions Distribution date range
Senior prepayment percentage
April 2016–March 2021
100%
April 2021–March 2022
Senior percentage (i) plus 70% of the subordinate percentage (ii)
April 2022–March 2023
Senior percentage plus 60% of the subordinate percentage
April 2023–March 2024
Senior percentage plus 40% of the subordinate percentage
April 2024–March 2025
Senior percentage plus 20% of the subordinate percentage
April 2025 and beyond
Senior percentage
(i) The senior percentage is the aggregate principal balance of the non-IO senior classes divided by the principal balance of all of the mortgage loans. (ii) The subordinate percentage is 100% minus the senior percentage. IO--Interest-only.
However, if the step-down test shown in Table 5 is not satisfied, the senior allocation of unscheduled principal collections on the mortgage loans will not decrease. The step-down test is satisfied on any distribution date if the principal balance of the 60-day delinquencies and mortgage loans subject to a servicing modification within the prior 12 months, averaged over the prior six months, is less than 50% of the balance of the subordinate notes, and cumulative realized losses do not exceed the levels listed in Table 5. Except in certain circumstances, scheduled principal payments will be distributed pro rata between the senior and subordinate notes. These payments to
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subordinate tranches reduce the absolute level of credit enhancement to the senior notes and require additional initial subordination above the expected loss in a given rating scenario. Table 5
Step-Down Test Distribution date range Cumulative realized losses (%) April 2021–March 2022
20
April 2022–March 2023
25
April 2023–March 2024
30
April 2024–March 2025
35
After April 2025
40
Principal distributions to a subordinate note are directed to more senior classes if the ratio of the sum of a particular subordinate class' balance and all the classes lower than it in the capital structure to the total outstanding balance of all the notes falls below the applicable credit support percentage for that class at issuance (see Table 6). This distribution amount is reallocated pro rata to the subordinate classes that are more senior in the capital structure. Table 6
Credit Support Percentage At Issuance Class
(%)
B-1
16.75
B-2
12.80
B-3
9.85
B-4
7.30
B-5
5.70
B-6
3.65
In addition, the transaction structure includes a subordination floor that protects senior classes from tail risk as the number of loans in the pool reduces. If the aggregate class balance of the subordinate notes is less than or equal to 3.10% of the closing principal balance (excluding deferred principal amounts), or if the subordinate percentage is less than 16.75% of current principal balance (excluding deferred principal amounts), all principal collections will be paid to the senior notes. The 3.10% floor also benefits the holders of suborindate notes, locking out principal payments to subordinate notes with lower payment priorities. Realized losses are applied reverse-sequentially to the class FB (if the loan incurring a loss had a deferred principal amount as of the cut-off date), then B-6, then B-5, then B-4, then B-3, then B-2, and then B-1 notes, in each case until the principal balance has been reduced to zero. If no subordinate notes are outstanding, realized losses will be applied to the senior class A-1 notes. Reimbursement for prior realized losses and write-downs are allocated first to the senior note and then sequentially to the subordinate notes in numerical order.
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Geographic Concentration Standard & Poor's analyzes the pool's geographic concentration risk based on the concentrations of loans in each of the core-based statistical areas (CBSAs) defined by the U.S. Office of Management and Budget (see "Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans," published Sept. 10, 2009, and "Updated Criteria For Evaluating Geographic Concentration In U.S. RMBS Mortgage Pools," published Nov. 16, 2012). In this transaction, the top 10 CBSAs account for 32.62% of the aggregate pool, and none exceed the concentration limits set forth in our criteria. Given the geographic diversity of the pool, no additional adjustment was applied to our loss coverage expectations. Table 7
Geographic Concentration CBSA code (i)
CBSA name
State
35614
New York-Jersey City-White Plains
NY/NJ
% by balance 5.59
31084
Los Angeles-Long Beach-Glendale
CA
4.89
11244
Anaheim-Santa Ana-Irvine
CA
3.96
12060
Atlanta-Sandy Springs-Roswell
GA
3.10
47894
Washington-Arlington-Alexandria
DC/VA/MD/WV
3.02
41740
San Diego-Carlsbad
CA
2.83
36084
Oakland-Hayward-Berkeley
CA
2.43
40900
Sacramento--Roseville--Arden-Arcade
GA
2.32
16974
Chicago-Naperville-Arlington Heights
IL
2.26
42644
Seattle-Bellevue-Everett
WA
2.22
Top 10
32.62
(i) CBSA code refers to the metropolitan division code, if available. CBSA--Core-based statistical area (includes metropolitan statistical areas and metropolitan divisions).
Large Loans And Tail Risk Considerations Quick prepayments on shifting-interest structures typically benefit the ratings on the senior notes because unscheduled principal is applied to them disproportionally early in the transaction's life. However, as the number of loans in the transaction decreases, the effect of a single loan's losses becomes greater. If conditional prepayment rates are slow and collateral pool losses are not realized until later in a transaction's life (back-loaded losses), pro rata pay mechanisms can then leave the senior notes exposed to event risk later in the transaction's life (for more information on tail risk in RMBS transactions, see "Older RMBS Transactions Face Increased Tail Risk As Their Pools Shrink," published Aug. 9, 2012). To account for this risk, the transaction documents specify that no principal payments will be made to the subordinate notes if the credit support available to the senior notes is less than or equal to 3.10% of the original principal balance (excluding deferred principal amounts) or 16.75% of the current principal balance (excluding deferred amounts). To gauge the appropriateness of this credit enhancement floor, instead of focusing on the largest loans by balance at
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issuance, we risk-weight the loans in the transaction by focusing on those loans with the largest expected loss exposure assuming default. Because the risk of substantial hard credit support erosion to the senior notes can take years, and given the lockout period, we estimate this risk by amortizing the loans through the lockout expiration at the end of Year 9 when the transaction begins paying all principal pro rata. After considering loan amortization, we believe that a 3.10% credit support floor will sufficiently protect the senior notes from tail risk as the transaction seasons. We generally expect that transactions with fewer loans at issuance, but with the same concentration of loan loss exposure, will have greater credit enhancement floors (as a percentage of the original balance) than pools with higher loan counts. The 3.10% floor also benefits the holders of subordinate notes, locking out principal payments to subordinate notes with lower payment priorities.
Mortgage Originator/Aggregator Review Per our Mortgage Originator Review criteria, we recognize that the performance of seasoned loans becomes a greater predictor of future performance than the originator's underwriting criteria. Given the significant seasoning of the loans, we have applied a neutral 1.00x mortgage originator review factor.
Third-Party Due Diligence Review AMC Diligence LLC performed an independent third-party loan level review on a portion of the loans in the pool with respect to regulatory compliance. A 245 random loan sample (representing 13% of the initial loan pool) and 92 loan adverse sample (representing 4.9% of the initial loan pool), comprised of reperforming and modified loans as well as those subject to state anti-predatory lending laws with uncapped assignee liability were reviewed. As a result of the initial findings in the population listed above, the review was expanded to an additional 432 loans, to check for state and federal anti-predatory lending law violations. Six loans were found to have material exceptions and were ultimately not included in the securitized pool. The review also identified many loans with non-material compliance findings, which included Truth In Lending Act (TILA) exceptions and right-to-cancel issues. However, due to the loan seasoning, each violation was either beyond the legal statute of limitations or no longer material to the performance of the loans. Twelve loans had grade C (RC) regulatory compliance exceptions because late fees documented on the notes were greater than the state-allowed maximum. Because the servicers have processes in place to ensure late fees charged are within state guidelines and are able to cure past excess late fee charges, combined with a borrower's inability to use excess late fee charges as a defense to foreclosure, Standard & Poor's considered these exceptions to be immaterial and the loans remain in the collateral pool without an additional assessment of credit enhancement. One hundred thirty-three loans (7.5% of the pool) received a grade D, of which 20 (1.1%) came from the random sample while 113 (6.4%) came from the adverse sample population. These exceptions were due to missing documentation (primarily missing HUD-1 settlement statements or final TIL disclosure statements). To address the potential risk associated with inability to complete the review, we assumed 100% loss severity for all grade D loans in
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the sample. In addition, we extrapolated the percentage of the grade D loans in the random selection population of the initial sample (8.2%) to the remainder of the final un-sampled portion of the pool (1,021 loans). (See "Incorporating Third-Party Due Diligence Results Into The U.S. RMBS Rating Process," published March 14, 2012.) One hundred thirty-one loans (7.4% of the pool) are missing documentation such as the mortgage (129) and the note instrument (two) as noted in the March 23 custodian collateral report. The custodial agreement provides for the custodian to deliver the initial certification with exception report as of the effective date (closing date). Per the terms of the transaction, if such missing documentation prevents or materially delays foreclosure, then the seller must deliver the missing documentation or else repurchase the loan from the trust. As described further below, to account for the risk the seller is unable or unwilling to repurchase the loan, we increased our loss projections for the pool by a factor of 1.10x at all rating levels.
Representations And Warranties (R&Ws) Our review of the R&Ws for NRMLT 2016-1 focused on whether the representations that the sellers, who are also the R&W providers, made were substantially consistent with the set of representations we published as part of our criteria (see "Standard & Poor’s Revised Representations And Warranties Criteria For U.S. RMBS Transactions," published Sept. 28, 2009). Based on our assessment of the transaction's R&W framework and the sellers' financial capacity, we applied a 1.10x factor to loss coverage at all rating levels to account for potential failed repurchase requests. We believe this risk is substantially mitigated in this pool, as the loans are significantly seasoned and have performed through a stressful economic period. We noted that there was no R&W stating "No borrower was encouraged or required to select a loan product offered by the originator that was a higher-cost product designed for less creditworthy borrowers, unless at the time of the mortgage loan's origination, the borrower did not qualify, taking into account credit history and debt-to-income ratios, for a lower cost credit product then offered by the originator or any affiliate of the originator," (see "Standard & Poor’s Revised Representations And Warranties Criteria For U.S. RMBS Transactions," published March 14, 2012). We believe the pool's seasoning mitigates the lack of this representation. The discovery and enforcement mechanisms do not include an automatic review of delinquent loans or loans that liquidate with a loss for suspected breaches nor any binding mechanism for the investors to enforce representations if the seller or guarantor contests the breach or claims that the threshold for material and adverse impact, provided in Section 7(b) of the mortgage loan purchase agreement, is not met. We currently do not rate NRZ Sponsor V LLC or NRZ Sponsor VI LLC, the transaction's R&W providers, which indicates that each such entity may have financial difficulty in meeting repurchase claims for a R&W breach. Both are relatively new entities and do not have a track record of observed repurchasing. While we believe that the risk of R&W claims is substantially mitigated given the loans' seasoning, their performance during a stressful economic environment, and the level of regulatory due diligence performed, we increased our loss expectations at all rating categories to account for this risk. Again, we believe the additional credit enhancement required and the significant loan seasoning mitigate the risk that the R&W provider may be unable or unwilling to cure R&W breaches.
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Cash Flow And Scenario Analysis We reviewed the transaction structure and performed a cash flow analysis to simulate various rating stress scenarios (see Tables 8 and 9) to determine the ratings for each class consistent with our criteria, taking into account the available credit enhancement. We analyzed a variety of scenarios for each rating category, including combinations of: • • • •
Standard and back-loaded default timing curves, adjusted for seasoned loans (see Table 8); One- and two-year recovery lag assumptions; Fast and slow prepayment assumptions; and Servicer stop advance stresses, which assume that a percentage of loans become delinquent and the servicer stops advancing on a portion of those loans. The percentage of delinquent loans ramps up from zero to a peak stress by Month 32 and gradually declines thereafter to nearly zero in the next 12 years. Since we consider LTV to be the primary driver of a servicer's decision to continue to advance delinquent payments, given the low WA CLTV of the pool, we considered the application of servicer stop advance stresses and associated delinquency curves analogous to those for prime collateral to be most appropriate.
Table 8
Default Timing Assumptions--Seasoned --% of cumulative defaults-Period (month)
Back-loaded
Standard
1
6.25
9.75
6
4.50
6.25
12
11.25
13.00
18
8.50
10.25
24
8.25
10.00
30
7.75
9.50
36
11.05
9.00
42
11.05
9.00
48
9.80
7.75
54
7.80
5.75
60
7.50
5.50
66
6.30
4.25
Table 9
Cash Flow Assumptions Scenario Recovery lag (mos.)
AAA
AA
A
BBB
BB+
B
12 and 24 12 and 24 12 and 24 12 and 24 12 and 24 12 and 24
Voluntary prepayments (i) (%) Low CPR
1.00
2.00
3.00
4.00
5.00
6.00
High CPR
20.00
20.00
20.00
20.00
20.00
20.00
Maximum delinquency (% of current balance)
15.00
13.00
11.00
9.00
7.00
5.00
Servicer stop advance (%)
10.00
10.00
5.00
5.00
2.00
2.00
Foreclosure frequency (%)
30.97
26.40
22.39
18.84
16.32
12.30
Loss severity (%)
41.98
39.78
36.85
33.17
30.63
25.20
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Table 9
Cash Flow Assumptions (cont.) Scenario
AAA
AA
A
BBB
BB+
B
Loss coverage (%)
13.00
10.50
8.25
6.25
5.00
3.10
(i) Using a total unscheduled balance reduction convention. CPR--Conditional prepayment rate.
We applied the foreclosure frequencies, loss severities, and combinations of the stresses noted above in our cash flow runs, and the results show that each rated class is enhanced to a degree consistent with the assigned preliminary ratings.
Imputed promises analysis In this transaction, extraordinary trust expense payments reduce the net WAC rate, which effectively allocates the extraordinary trust expenses pro rata across all senior and subordinate noteholders by reducing their interest payments by the amount of the extraordinary trust expenses paid (subject to the annual cap). Since subordination does not absorb these expense amounts, our trust expense analysis does not have an impact on the transaction's credit enhancement. However, per our criteria "Methodology For Incorporating Loan Modifications And Extraordinary Expenses Into U.S. RMBS Ratings," published April 17, 2015, when rating U.S. RMBS transactions where credit-related events can result in a reduction in interest owed to the tranches across the capital structure rather than an allocation of such credit-related loss to the available credit support, we impute the interest owed to the security holders. WAC deterioration that occurs due to defaults, repurchases, or prepayments is not considered credit-related and is therefore not considered as part of this analysis. Because this transaction provides for credit-related loan modifications and extraordinary trust expenses to reduce the net WAC, at which the notes' coupons are capped, we applied the approach outlined in the criteria to assess the maximum potential rating (MPR) that could apply based on our projected interest reduction amount (PIRA). Consistent with our criteria, we assumed that 50% of the loans projected to default would be modified, resulting in a projected WAC deterioration of the pool. Since this is a new issue transaction, there was no cumulative interest reduction amount (CIRA) to be accounted for. In an event of default, the reimbursement of extraordinary trust expenses is no longer subject to the $250,000 annual cap. In addition, servicer and master servicer transfer costs, which are typically uncapped in most U.S. RMBS transactions but are generally paid by the outgoing servicer or master servicer, respectively, to the extent possible, are paid solely from the trust if the servicer or master servicer is terminated without cause. Therefore, to address the potential for uncapped expenses, we stressed the extraordinary trust expenses by an additional $150,000 up to a maximum $400,000 annually at the 'AAA' rating category, stepping-down by the relevant extraordinary expense application factors for non-prime collateral over the first 78 months of the transaction's life. Based on the results of our analysis, there was no impact on the MPR of the securities. Historically, we have observed that extraordinary trust expenses have been minimal when they occur and have been extremely limited in pre-2009 RMBS transactions. We continue to expect their actual occurrence in post-2009 transactions to be rare.
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Operational risk assessment Our criteria "Global Framework For Assessing Operational Risk In Structured Finance Transactions," published Oct. 9, 2014, present our methodology and assumptions for assessing certain operational risks (severity, portability, and disruption risks) associated with asset types and key transaction parties (KTPs) that provide an essential service to a structured finance issuer. According to the criteria, we cap the ratings on a transaction if we believe operational risk could lead to credit instability and affect the ratings. As provided in the operational risk criteria, for severity risk and portability risk, there are three possible rankings: "high," "moderate," or "low." For disruption risk, there are four possible rankings: "very high," "high," "moderate," or "low." The rankings for each of the three risks determine the maximum potential rating that can be assigned to a structured finance security for a given KTP before giving consideration to any provisions for a backup KTP, such as a master servicer. After assessing the severity, portability, and disruption risks for each of the servicers, we determined the ratings on these classes would not be affected. In accordance with our criteria, we rank severity and portability risk for non-prime residential mortgage collateral as moderate and low, respectively. For NRMLT 2016-1, the KTPs are the servicers, Ocwen, Nationstar, and PNC Mortgage, a division of PNC Bank N.A. (PNC). While we consider the disruption risk for Nationstar and PNC as low, we consider that of Ocwen as high, which reflects our view of the likelihood of a material disruption in its services. Given these risk assessments, our criteria cap the ratings on the transaction on account of Ocwen as servicer at 'AA (sf)' but also allow for a one-notch increase to 'AA+' (sf)' because of the role of Nationstar as back-up KTP. Given the collateral's low risk assessment for portability, the criteria also allow for an additional one-notch increase from 'AA+' to 'AAA' because the pool has seasoned past its peak loss period, and therefore, the transaction's operational risk is lower.
Related Criteria And Research Related Criteria • Methodology And Assumptions: U.S. RMBS Surveillance Credit And Cash Flow Analysis For Pre-2009 Originations, March 2, 2016 • Revised U.S. Residential Mortgage Input File Format, Glossary, And Appendices To The Glossary For LEVELS Version 7.4.3, June 1, 2015 • Revised Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans Incorporated Into LEVELS Version 7.4.3, June 1, 2015 • Methodology And Assumptions For Ratings Above The Sovereign--Single-Jurisdiction Structured Finance, May 29, 2015 • Methodology For Incorporating Loan Modifications And Extraordinary Expenses Into U.S. RMBS Ratings, April 17, 2015 • Methodology: Criteria For Global Structured Finance Transactions Subject To A Change In Payment Priorities Or Sale Of Collateral Upon A Nonmonetary EOD, March 2, 2015 • Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 • Global Framework For Cash Flow Analysis Of Structured Finance Securities, Oct. 9, 2014 • Methodology And Assumptions For Adjusting RMBS Loss Severity Calculations For Loans Covered Under Ability-To-Repay And Qualified Mortgage Standards, Jan. 23, 2014 • Updated Criteria For Evaluating Geographic Concentration In U.S. RMBS Mortgage Pools, Nov. 16, 2012
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Presale: New Residential Mortgage Loan Trust 2016-1 • • • • • • • • • • • • • • • • • • • • • • •
Criteria Methodology Applied To Fees, Expenses, And Indemnifications, July 12, 2012 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Methodology For Applying RMBS Small Pool Adjustment Factor, May 24, 2012 U.S. Interest Rate Assumptions Revised For May 2012 And Thereafter, April 30, 2012 Mortgage Originator Review Criteria For U.S. RMBS, April 17, 2012 Updated Assumptions For Liquidation Timelines In The U.S. Residential Mortgage Market, April 13, 2012 Standard & Poor’s Revised Representations And Warranties Criteria For U.S. RMBS Transactions, March 14, 2012 Incorporating Third-Party Due Diligence Results Into The U.S. RMBS Rating Process, March 14, 2012 Standard & Poor’s Criteria For analyzing Loans Governed By Anti-Predatory Lending Laws, July 22, 2011 Revised Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans Incorporated Into LEVELS Version 7.3, June 1, 2011 Methodology For Seasoned Loans In U.S. RMBS Transactions, April 30, 2010 Global Methodology For Rating Interest-Only Securities, April 15, 2010 Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans, Sept. 10, 2009 Methodology For Loan Modifications That Include Forbearance Plans For U.S. RMBS, July 23, 2009 Understanding Standard & Poor’s Rating Definitions, June 3, 2009 Standard & Poor's Revises Criteria Methodology For Servicer Risk Assessment, May 28, 2009 Revised Criteria For Including RMBS, CMBS, And ABS Servicers On Standard & Poor's Select Servicer List, April 16, 2009 Methodology And Assumptions: Approach To Evaluating U.S. RMBS Distressed Collateral, Nov. 19, 2008 Application Of Revised Cash Flow Assumptions For U.S. Residential Mortgage-Backed Securities, April 30, 2008 Analysis Of Loan Modifications And Servicer Reimbursements For U.S. RMBS Transactions With Senior/Subordinate Structures, April 10, 2008 Revised Guidelines For U.S. RMBS Loan Modification And Capitalization Reimbursement Amounts, Oct. 11, 2007 Legal Criteria For U.S. Structured Finance Transactions: Securitizations By SPE Transferors And Non-Code Transferors, Oct. 1, 2006 Servicer Evaluation Ranking Criteria: U.S., Sept. 21, 2004
Related Research • Select Servicer List, March 23, 2016 • S&P Publishes Updated List Of Third-Party Due Diligence Firms Reviewed For U.S. RMBS As Of Dec. 24, 2015, Dec. 24, 2015 • Economic Research: U.S. To Get *NSync And Move In One Direction (Up) Next Year, Dec. 3 2015 • Credit Rating Model: Intex DealMaker - Core 4 Cash Flow Model, Nov. 16, 2015 • Credit Rating Model: U.S. RMBS Supplemental Collateral Analyzer, Nov. 10, 2015 • U.S. RMBS Supplemental Collateral Analyzer, Nov. 10, 2015 • Servicer Evaluation: Ocwen Loan Servicing LLC, Nov. 9, 2015 • Servicer Evaluation: Nationstar Mortgage LLC, Oct. 6, 2015 • Servicer Evaluation: PNC Bank N.A., April 23, 2015 • Credit Rating Model: LEVELS Model For U.S. Residential Mortgage Loans, April 17, 2015 • Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 • A Resilient Housing Market And Economic Momentum Buttress U.S. RMBS, May 30, 2014 • How Standard & Poor's Reviews Extraordinary Expenses In Post-2009 RMBS Transactions, July 15, 2013 • Older RMBS Transactions Face Increased Tail Risk As Their Pools Shrink, Aug. 9, 2012
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In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, 2009.
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