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
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%.
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
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 '
Additional information is available at 'www.fitchratings.com'.
--'Global Structured Finance Rating Criteria' (
--'U.S. RMBS Loan Loss Model Criteria' (
--'U.S. RMBS Rating Criteria' (
Global Structured Finance Rating Criteria
U.S. RMBS Loan Loss Model Criteria
U.S. RMBS Rating Criteria
Source: Fitch Ratings
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