Fitch Expects to Rate Fannie Mae’s Connecticut Ave Securities, Series 2016-C06; Presale Issued

NEW YORK–(BUSINESS WIRE)–Fitch Ratings expects to assign the following ratings and Rating
Outlooks to Fannie Mae’s risk transfer transaction, Connecticut Avenue
Securities, series 2016-C06:

–$393,343,000 class 1M-1 notes ‘BBB-sf’; Outlook Stable;

–$188,804,000 class 1M-2A notes ‘BB+sf’; Outlook Stable;

–$361,875,000 class 1M-2B notes ‘B+sf’; Outlook Stable;

–$550,679,000 class 1M-2 exchangeable notes ‘B+sf’; Outlook Stable;

–$188,804,000 class 1M-2I exchangeable notional notes ‘BB+sf’; Outlook
Stable;

–$188,804,000 class 1M-2R exchangeable notes ‘BB+sf’; Outlook Stable;

–$188,804,000 class 1M-2S exchangeable notes ‘BB+sf’; Outlook Stable;

–$188,804,000 class 1M-2T exchangeable notes ‘BB+sf’; Outlook Stable;

–$188,804,000 class 1M-2U exchangeable notes ‘BB+sf’; Outlook Stable.

The following classes will not be rated by Fitch:

–$31,798,710,605 class 1A-H reference tranche;

–$20,702,711 class 1M-1H reference tranche;

–$9,937,941 class 1M-AH reference tranche;

–$19,047,054 class 1M-BH reference tranche;

–$80,000,000 class 1B notes;

–$251,236,568 class 1B-H reference tranche.

The ‘BBB-sf’ rating for the 1M-1 note reflects the 2.75% subordination
provided by the 0.60% class 1M-2A note, the 1.15% class 1M-2B and the
1.00% 1B note, and their corresponding reference tranches. The notes are
general senior unsecured obligations of Fannie Mae (rated ‘AAA’/Outlook
Stable) subject to the credit and principal payment risk of a pool of
certain residential mortgage loans held in various Fannie Mae-guaranteed
MBS.

The reference pool of mortgages will consist of mortgage loans with LTVs
greater than 60% and less than or equal to 80%.

Connecticut Avenue Securities, series 2016-C06 (CAS 2016-C06) is Fannie
Mae’s 15th risk transfer transaction issued as part of the Federal
Housing Finance Agency’s Conservatorship Strategic Plan for 2013 – 2017
for each of the government sponsored enterprises (GSEs) to demonstrate
the viability of multiple types of risk transfer transactions involving
single family mortgages.

The objective of the transaction is to transfer credit risk from Fannie
Mae to private investors with respect to a $33.1 billion pool of
mortgage loans currently held in previously issued MBS guaranteed by
Fannie Mae where principal repayment of the notes are subject to the
performance of a reference pool of mortgage loans. As loans liquidate,
are modified or other credit events occur, the outstanding principal
balance of the debt notes will be reduced by the loan’s actual loss
severity percentage related to those credit events.

While the transaction structure simulates the behavior and credit risk
of traditional RMBS mezzanine and subordinate securities, Fannie Mae
will be responsible for making monthly payments of interest and
principal to investors. Because of the counterparty dependence on Fannie
Mae, Fitch’s expected rating on the 1M-1, 1M-2A and 1M-2B notes will be
based on the lower of: the quality of the mortgage loan reference pool
and credit enhancement (CE) available through subordination; and Fannie
Mae’s Issuer Default Rating. The notes will be issued as uncapped
LIBOR-based floaters and will carry a 12.5-year legal final maturity.

KEY RATING DRIVERS

High Quality Mortgage Pool (Positive): The reference mortgage loan pool
consists of high quality mortgage loans that were acquired by Fannie Mae
from November 2015 through February 2016. In this transaction, Fannie
Mae has only included one group of loans with loan-to-value ratios
(LTVs) from 60% to 80%. Overall, the reference pool’s collateral
characteristics are similar to recent CAS transactions and reflect the
strong credit profile of post-crisis mortgage originations.

Actual Loss Severities (Neutral): This will be Fannie Mae’s seventh
actual loss risk transfer transaction in which losses borne by the
noteholders will not be based on a fixed loss severity (LS) schedule.
The notes in this transaction will experience losses realized at the
time of liquidation or modification, which will include both lost
principal and delinquent or reduced interest.

12.5-Year Hard Maturity (Positive): The 1M-1, 1M-2A, 1M-2B, and 1B notes
benefit from a 12.5-year legal final maturity. As a result, any
collateral losses on the reference pool that occur beyond year 12.5 are
borne by Fannie Mae and do not affect the transaction. Fitch accounted
for the 12.5-year window in its default analysis and applied a reduction
to its lifetime default expectations.

Limited Size/Scope of Third-Party Diligence (Neutral): This is the
second transaction in which Fitch received third-party due diligence on
a loan production basis as opposed to a transaction-specific review.
Fitch believes that regular, periodic third-party reviews (TPRs)
conducted on a loan production basis are sufficient for validating
Fannie Mae’s quality-control (QC) processes. The sample selection was
limited to a population of 7,309 loans that were previously reviewed as
part of Fannie Mae’s post-purchase QC review and met the reference
pool’s eligibility criteria. Of those loans, 1,998 were selected for a
full review (credit, property valuation, and compliance) by third-party
due diligence providers. Of the 1,998 loans, 607 were part of this
transaction’s reference pool. Fitch views the results of the due
diligence review as consistent with its opinion of Fannie Mae as an
above-average aggregator; as a result, no adjustments were made to
Fitch’s loss expectations based on due diligence.

Advantageous Payment Priority (Positive): The 1M-1 class strongly
benefits from the sequential pay structure and stable CE provided by the
more junior 1M-2A, 1M-2B, and 1B classes, which are locked out from
receiving any principal until classes with a more senior payment
priority are paid in full. However, available CE for the junior classes
as a percentage of the outstanding reference pool increases in tandem
with the paydown of the 1M-1 class. Given the size of the 1M-1 class
relative to the combined total of all the junior classes, together with
the sequential pay structure, the class 1M-1 will de-lever and CE as a
percentage will build faster than in a pro rata payment structure.

Solid Alignment of Interests (Positive): While the transaction is
designed to transfer credit risk to private investors, Fitch believes
that it benefits from a solid alignment of interests. Fannie Mae will be
retaining credit risk in the transaction by holding the 1A-H senior
reference tranches, which have an initial loss protection of 4.00%, as
well as at least 50% of the first loss 1B-H reference tranche, sized at
76 bps. Fannie Mae is also retaining an approximately 5% vertical
slice/interest in the 1M-1, 1M-2A, and 1M-2B tranches.

Receivership Risk Considered (Neutral): Under the Federal Housing
Finance Regulatory Reform Act, the Federal Housing Finance Agency (FHFA)
must place Fannie Mae into receivership if it determines that Fannie
Mae’s assets are less than its obligations for more than 60 days
following the deadline of its SEC filing, as well as for other reasons.
As receiver, FHFA could repudiate any contract entered into by Fannie
Mae if it is determined that the termination of such contract would
promote an orderly administration of Fannie Mae’s affairs. Fitch
believes that the U.S. government will continue to support Fannie Mae;
this is reflected in Fitch’s current rating of Fannie Mae. However, if,
at some point, Fitch views the support as being reduced and receivership
likely, the ratings of Fannie Mae could be downgraded and the 1M-1,
1M2A, and 1M-2B notes’ ratings affected.

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
MDVs of 10%, 20%, and 30%, in addition to the model-projected 23.6% at
the ‘BBBsf’ level and 18.9% at the ‘BBsf’ 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%, 11% and 35% would potentially reduce the ‘BBBsf’ 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 Adfitech, Inc.
The due diligence focused on credit and compliance reviews, desktop
valuation reviews and data integrity. Adfitech examined selected loan
files with respect to the presence or absence of relevant documents.
Fitch received certifications indicating that the loan-level due
diligence was conducted in accordance with Fitch’s published standards.
The certifications also stated that the company performed its work in
accordance with the independence standards, per Fitch’s criteria, and
that the due diligence analysts performing the review met Fitch’s
criteria of minimum years of experience. Fitch considered this
information in its analysis and the findings did not have an impact on
the analysis.

The offering documents for CAS 2016-C06 do not disclose any
representations, warranties, or enforcement mechanisms (RWEs) that are
available to investors and which relate to the underlying asset pools.
Please see Fitch’s Special Report for further information regarding
Fitch’s approach to the disclosure of a transaction’s RWEs as required
under SEC Rule 17g-7.

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 Fannie Mae.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01
Sep 2016)

https://www.fitchratings.com/site/re/886006

Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes
(pub. 08 Mar 2016)

https://www.fitchratings.com/site/re/878513

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Rating Criteria for U.S. Residential and Small Balance Commercial
Mortgage Servicers (pub. 23 Apr 2015)

https://www.fitchratings.com/site/re/864368

U.S. RMBS Cash Flow Analysis Criteria (pub. 15 Apr 2016)

https://www.fitchratings.com/site/re/880006

U.S. RMBS Loan Loss Model Criteria (pub. 12 May 2016)

https://www.fitchratings.com/site/re/880673

U.S. RMBS Master Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/882350

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 17 Jun 2016)

https://www.fitchratings.com/site/re/881806

Related Research

Connecticut Avenue Securities, Series 2016-C06 (Fannie Mae Risk Transfer
Transaction) (US RMBS)

https://www.fitchratings.com/site/re/889814

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014076

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014076

Endorsement Policy

https://www.fitchratings.com/regulatory

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