News Column

Fitch Expects to Rate Sequoia Mortgage Trust 2014-2; Presale Issued

July 7, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to rate Sequoia Mortgage Trust 2014-2 (SEMT 2014-2) as follows:

--$282,327,000 class A-1 exchangeable certificate 'AAAsf'; Outlook Stable;

--$225,862,000 class A-2 certificate 'AAAsf'; Outlook Stable;

--$56,465,000 class A-3 certificate 'AAAsf'; Outlook Stable;

--$282,327,000 class A-4 exchangeable certificate 'AAAsf'; Outlook Stable;

--$225,862,000 class A-5 exchangeable certificate 'AAAsf'; Outlook Stable;

--$56,465,000 class A-6 exchangeable certificate 'AAAsf'; Outlook Stable;

--$282,327,000 class A-IO notional certificate 'AAAsf'; Outlook Stable;

--$282,327,000 class A-IO1 notional exchangeable certificate 'AAAsf'; Outlook Stable;

--$282,327,000 class A-IO2 notional exchangeable certificate 'AAAsf'; Outlook Stable;

--$8,876,000 class B-1 certificate 'AAsf'; Outlook Stable;

--$5,050,000 class B-2 certificate 'Asf'; Outlook Stable;

--$4,896,000 class B-3 certificate 'BBBsf'; Outlook Stable;

--$1,684,000 non-offered class B-4 certificate 'BBsf'; Outlook Stable.

The $3,213,543 non-offered class B-5 certificate is not expected to be rated by Fitch.

KEY RATING DRIVERS

Ability to Repay (ATR) and Qualified Mortgage (QM): Of the total pool, 384 loans on primary or secondary residences have application dates of Jan. 10, 2014 or later and are therefore subject to the ATR/QM Rule. Of these, three Prime Lending loans were originated as non-QM, resulting in an increase of 2.6 basis points (bps) to the pool's 'AAAsf' loss severity (LS). The remaining 381 loans were classified as safe harbor QM (SHQM), for which no adjustment was made.

There were four additional loans made on investment properties with application dates on or after Jan. 10, 2014 which are not subject to the ATR/QM Rule since they were made for business purposes. All designations were confirmed by the third-party reviews, except for 41 First Republic Bank (FRB) loans, which Fitch is comfortable with given its review of FRB's practices and procedures for ensuring compliance with the ATR/QM Rule.

Due Diligence Exception: Roughly 23% of FRB-originated loans in the initial population of loans considered for this securitization were reviewed by the third-party due diligence provider Clayton Services LLC. However, four of these reviewed loans were not included in the final securitized pool. As a result, the percentage of FRB loans reviewed dropped to 16%, which is less than (by two loans) the 20% Fitch expects for each contributing originator in a new issue prime RMBS conduit transaction under its 'U.S. RMBS Master Rating Criteria' (dated July 2014).

Fitch considers this to be a nonsubstantive deviation, given the agency's view of FRB as an above-average originator, the strong historical performance of FRB's originations and the lack of material findings on the FRB loans reviewed.

High-Quality Mortgage Pool: The collateral pool consists of 30-year fixed-rate, fully documented loans to borrowers with strong credit profiles, low leverage and substantial liquid reserves. Third-party, loan-level due diligence was conducted on 90.6% of the pool, and Fitch believes the results indicate strong underwriting controls.

Market Value Decline Sensitivity: Fitch's sustainable home price model suggests house prices for the pool are overvalued by roughly 17.4%, which results in an 'Asf' sustainable market value decline (sMVD) stress above the recent national housing recession's peak-to-trough experience. A sensitivity analysis was factored into Fitch's analysis to better align its sMVD stress to recent observations, which resulted in applying a base sMVD of 15.2%.

Aggregator Quality: Based on Fitch's aggregator review of Redwood Residential Acquisition Corporation (Redwood), Redwood's loan acquisition platform and underwriting overlays it applies to loans it acquires are robust, as evidenced by the very limited findings from the due diligence review. Fitch factored these qualitative strengths in its loss expectations despite the large number of unproven originators participating in Sequoia transactions. Fitch believes that Redwood's sound acquisition strategy is also reflected in the very strong performance of the post-crisis Sequoia pools.

Cash Flow Structure: The transaction features a traditional senior subordinate shifting interest structure. Furthermore, the trust provides for expenses, including indemnification amounts and costs of arbitration, to be paid by the net weighted average coupon (WAC) of the loans, which does not impact the contractual interest due on the certificates.

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.

Fitch conducted sensitivity analysis 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 15.2% for this pool. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.

Fitch's stress and rating sensitivity analysis are discussed in its presale report released today 'Sequoia Mortgage Trust 2014-2', available at 'www.fitchratings.com'.

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

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 from the 17g5 website available on 'www.structuredfn.com'.

Applicable Criteria and Related Research

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

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);

--'U.S. RMBS Master Rating Criteria' (July 2014);

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

--'U.S. RMBS Cash Flow Analysis Criteria' (April 2014);

--'Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers' (January 2014);

--'U.S. RMBS Surveillance and re-REMIC Criteria' (June 2014);

--'U.S. RMBS Qualified and Non-Qualified Mortgage Criteria' (March 2014).

Applicable Criteria and Related Research: Sequoia Mortgage Trust 2014-2 (US RMBS)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751676

Global Structured Finance Rating Criteria

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

Counterparty Criteria for Structured Finance and Covered Bonds

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

U.S. RMBS Master Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750719

U.S. RMBS Loan Loss Model Criteria

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

U.S. RMBS Cash Flow Analysis Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=746027

U.S. RMBS Qualified and Non-Qualified Mortgage Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740197

Rating Criteria for US Residential and Small Balance Commercial Mortgage Servicers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=731747

U.S. RMBS Surveillance and Re-REMIC Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750110

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838355

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

Roger Lin

Director

+1-212-908-0778

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Vanessa Purwin

Senior Director

+1-212-908-0269

or

Committee Chairperson

Roelof Slump

Managing Director

+1-212-908-0705

or

Media Relations:

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

sandro.scenga@fitchratings.com


Source: Fitch Ratings


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