News Column

Fitch Expects to Rate J.P. Morgan Mortgage Trust 2014-2; Presale Issued

June 20, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to rate J.P. Morgan Mortgage Trust 2014-2 as follows:

--$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 $1,823,213 class B-5 certificates will not be rated.

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' with a Stable Outlook by Fitch) 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%.

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 16.1%, compared with the model projected 18.9%.

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 18.9% 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.

Fitch's stress and rating sensitivity analysis are discussed in the presale report titled ' J.P. Morgan Mortgage Trust 2014-2', dated June 2014, which is available on Fitch's web site, www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Global Structured Finance Rating Criteria' (May 2014);

--'U.S. RMBS Loan Loss Model Criteria' (December 2013);

--'U.S. RMBS Rating Criteria' (July 2013).

Applicable Criteria and Related Research: J.P. Morgan Mortgage Trust 2014-2 (US RMBS)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750629

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748821

U.S. RMBS Loan Loss Model Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=727095

U.S. RMBS Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=713083

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835680

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Christine Yan

Director

+1-212-908-0838

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Matthew Shaw

Director

+1-212-908-0218

or

Committee Chairperson

Grant Bailey

Managing Director

+1-212-908-0544

or

Media Relations

Sandro Scenga, New York, +1-212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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