DBRS Morningstar Finalizes Provisional Rating on Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2021-1

DBRS, Inc. (DBRS Morningstar) finalized a provisional rating on the following Mortgage-Backed Security, Series 2021-1 issued by Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2021-1 (the Trust):

-- $36.8 million Class M at B (low) (sf)

DBRS Morningstar did not rate the other classes in the Trust.

This transaction is a securitization of a portfolio of seasoned, reperforming first-lien residential mortgages funded by the issuance of the certificates, which are backed by 11,123 loans with a total principal balance of $1,227,241,824 as of the Cut-Off Date.

The mortgage loans were either purchased by Freddie Mac from securitized Freddie Mac Participation Certificates or retained by Freddie Mac in whole-loan form since their acquisition. The loans are currently held in Freddie Mac’s retained portfolio and will be deposited into the Trust on the Closing Date.

The loans are approximately 160 months seasoned and approximately 50.6% of them have been modified. Each modified mortgage loan was modified under the Government-Sponsored Enterprise (GSE) Home Affordable Modification Program (HAMP), GSE non-HAMP modification programs, or under or subject to a Freddie Mac payment deferral program (PDP). The remaining loans (49.4%) were never modified or were subject to a PDP. Within the pool, 1,160 mortgages have forborne principal amounts as a result of modification, which equates to 3.7% of the total unpaid principal balance as of the Cut-Off Date. For 54.3% of the modified loans, the modifications happened more than two years ago.

The loans are all current as of the Cut-Off Date. Furthermore, 77.6% and 40.9% of the mortgage loans have been zero times 30 days delinquent (0 x 30) for at least the past 12 and 24 months, respectively, under the Mortgage Bankers Association delinquency methods. DBRS Morningstar assumed all loans within the pool are exempt from the Qualified Mortgage rules because of their eligibility to be purchased by Freddie Mac.

The mortgage loans will be serviced by Specialized Loan Servicing LLC. There will not be any advancing of delinquent principal or interest on any mortgages by the servicer; however, the servicer is obligated to advance to third parties any amounts necessary for the preservation of mortgaged properties or real estate owned properties acquired by the Trust through foreclosure or a loss mitigation process.

Freddie Mac will serve as the Sponsor, Seller, and Trustee of the transaction as well as the Guarantor of the senior certificates (i.e., Class HAU, Class HA, Class HA-IO, Class HBU, Class HB, Class HB-IO, Class HTU, Class HT, Class HT-IO, Class HV, Class HZ, Class MAU, Class MA, Class MAW, Class MA-IO, Class MBU, Class MB, Class MB-IO, Class MBW, Class MTU, Class MT, Class MT-IO, Class MTW, Class MV, Class MZ, Class TAU, Class TAW, Class TAY, Class TA, Class TA-IO, Class TBU, Class TBW, Class TBY, Class TB, Class TB-IO, Class TT, Class TT-IO, Class TTU, Class TTW, Class TTY, Class M5AU, Class M5AW, Class M5AY, Class M55A, Class M5AI, Class M5BU, Class M5BW, Class M5BY, Class M55B, Class M5BI, Class M55T, Class M5TI, Class M5TU, Class M5TW, and Class M5TY Certificates). Wilmington Trust, National Association (Wilmington Trust) will serve as the Trust Agent. Wells Fargo Bank, N.A. will serve as the Custodian for the Trust. U.S. Bank National Association will serve as the Securities Administrator for the Trust and will also act as the Paying Agent, Registrar, Transfer Agent, and Authenticating Agent.

Freddie Mac, as the Seller, will make certain representations and warranties (R&W) with respect to the mortgage loans. It will be the only party from which the Trust may seek indemnification (or, in certain cases, a repurchase) as a result of a breach of R&Ws. If a breach review trigger occurs during the warranty period, the Trust Agent, Wilmington Trust, will be responsible for the enforcement of R&Ws. The warranty period will only be effective through April 12, 2024 (approximately three years from the Closing Date), for substantially all R&Ws other than the real estate mortgage investment conduit R&W and the mortgage loans whose high-cost regulatory compliance was unable to be tested, which will not expire.

The mortgage loans will be divided into four loan groups: Group H, Group M, Group M55, and Group T. The Group H loans (1.1% of the pool) were subject to step-rate modifications and had not yet reached their final step rate as of January 31, 2021. As of the Cut-Off Date, the borrower, while still current, has not made any payments accrued at such final step rate. Group M loans (41.4% of the pool) and Group M55 loans (6.9% of the pool) were subject to either fixed-rate modifications or step-rate modifications that have reached their final step rates and, as of the Cut-Off Date, the borrowers have made at least one payment after such mortgage loans reached their respective final step rates. Each Group M loan has a mortgage interest rate less than or equal to 5.5% and has no forbearance, or may have forbearance and any mortgage interest rate. Each Group M55 loan has a mortgage interest rate higher than 5.5%. Group T loans (50.7% of the pool) were never modified or were subject to a PDP.

P&I on the Guaranteed Certificates will be guaranteed by Freddie Mac. The Guaranteed Certificates will be primarily backed by collateral from each group, respectively. The remaining Certificates, including the subordinate, nonguaranteed, interest-only mortgage insurance, and residual Certificates, will be cross-collateralized among the four groups.

The transaction employs a pro rata pay cash flow structure among the senior group certificates with a sequential pay feature among the subordinate certificates. Certain principal proceeds can be used to cover interest shortfalls on the rated Class M Certificates. Senior classes, other than Class A-IO, benefit from P&I payments that are guaranteed by the Guarantor, Freddie Mac; however, such guaranteed amounts, if paid, will be reimbursed to Freddie Mac from the P&I collections prior to any allocation to the subordinate certificates. The senior principal distribution amounts vary, subject to the satisfaction of a step-down test. Realized losses are allocated reverse sequentially.

CORONAVIRUS DISEASE (COVID-19) PANDEMIC IMPACT
The coronavirus pandemic and the resulting isolation measures have caused an economic contraction, leading to sharp increases in unemployment rates and income reductions for many consumers. DBRS Morningstar anticipates that delinquencies may continue to rise in the coming months for many residential mortgage-backed security (RMBS) asset classes, some meaningfully.

Seasoned reperforming loans (RPL) is a traditional RMBS asset class that consists of securitizations backed by pools of seasoned performing and reperforming residential home loans. Although borrowers in these pools may have experienced delinquencies in the past, the loans have been largely performing for at least the past six months to 24 months since modification. Generally, these pools are highly seasoned and contain sizable concentrations of previously modified loans.

As a result of the coronavirus, DBRS Morningstar has seen increased delinquencies, and loans on forbearance plans, and expects a potential near-term decline in the values of the mortgaged properties. Such deteriorations may adversely affect borrowers’ ability to make monthly payments, refinance their loans, or sell properties in an amount sufficient to repay the outstanding balance of their loans.

In connection with the economic stress assumed under its moderate scenario (see “Global Macroeconomic Scenarios: March 2021 Update,” published on March 17, 2021), for the RPL asset class, DBRS Morningstar applies more severe market value decline (MVD) assumptions across all rating categories than it previously used. DBRS Morningstar derives such MVD assumptions through a fundamental home price approach, based on the forecast unemployment rates and GDP growth outlined in the moderate scenario. In addition, for pools with loans on forbearance plans, DBRS Morningstar may assume higher loss expectations above and beyond the coronavirus assumptions. Such assumptions translate to higher expected losses on the collateral pool and correspondingly higher credit enhancement.

In the RPL asset class, while the full effect of the coronavirus may not occur until a few performance cycles later, DBRS Morningstar generally believes that loans with previous delinquencies, recent modifications, or higher updated loan-to-value (LTV) ratios may be more sensitive to economic hardships resulting from higher unemployment rates and lower incomes. Borrowers with previous delinquencies or recent modifications have exhibited difficulty in fulfilling payment obligations in the past and may revert to spotty payment patterns in the near term. Higher LTV borrowers with lower equity in their properties generally have fewer refinance opportunities and, therefore, slower prepayments.

In addition, for this transaction, as permitted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law on March 27, 2020, approximately 0.4% of the pool balance was on coronavirus-related forbearance plans because the borrowers reported financial hardship; however, the loans are current as of the Cut-Off Date. These forbearance plans allow temporary payment holidays followed by repayment once the forbearance period ends. The servicer is generally offering borrowers a three-month payment forbearance plan. Beginning in month four, the borrower can repay all the missed mortgage payments at once or opt to go on a repayment plan to catch up on missed payments for a maximum generally of six to 12 months. During the repayment period, the borrower needs to make regular payments and additional amounts to catch up on the missed payments. Generally, the servicer would attempt to contact the borrowers before the expiration of the forbearance period and evaluate the borrowers' capacity to repay the missed amounts. As a result, the servicer, in adherence to the CARES Act, may offer a repayment plan or other forms of payment relief, such as deferrals of the unpaid P&I amounts or a loan modification, in addition to pursuing other loss mitigation options and in accordance with the pooling and service agreement.

For this transaction, DBRS Morningstar applied additional assumptions to evaluate the impact of potential cash flow disruptions on the rated tranches, stemming from (1) lower P&I collections and (2) no servicing advances on delinquent P&I. These assumptions include:
(1) Increased delinquencies for the first 12 months.
(2) A 25-basis-point weighted-average coupon deterioration stress for the cash flow run.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases and commentary: "DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19)," dated March 12, 2020; "DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19)," dated March 20, 2020; and “Global Macroeconomic Scenarios: March 2021 Update,” dated March 17, 2021.

The rating reflects transactional strengths that include the following:

-- Current loans with relatively good payment histories;
-- LTV ratios;
-- Satisfactory third-party due-diligence review;
-- Seasoning.

The transaction also includes the following challenges:

-- R&W standard; and
-- No servicer advances of delinquent P&I.

The full description of the strengths, challenges, and mitigating factors is detailed in the related presale report.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (April 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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