KBRA Assigns Preliminary Ratings to Freddie Mac’s STACR 2020-HQA3

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) assigns preliminary ratings to 23 classes from Structured Agency Credit Risk (STACR®) REMIC 2020-HQA3 Notes, Freddie Mac STACR REMIC Trust 2020-HQA3 (STACR 2020-HQA3), a credit risk sharing transaction with a total note offering of $735,000,000. STACR 2020-HQA3 features credit exposure to Reference Obligations with original loan-to-value (LTV) ratios greater than 80% but less than or equal to 97%. The Offered Notes represent obligations of the STACR 2020-HQA3 Trust in a credit-linked reference note structure governed in part by the Collateral Administration Agreement (CAA) and the Capital Contribution Agreement (CCA) between the Issuer and Freddie Mac, with payments subject to the credit and principal payment risks of the STACR 2020-HQA3 Reference Pool.

The STACR 2020-HQA3 Reference Pool consists of 118,543 residential mortgage loans with an outstanding principal balance of approximately $31.3 billion as of the Cut-Off Date. The Reference Obligations are fully documented, fully amortizing, primarily 30-year fixed-rate mortgages (FRMs) of prime quality. The borrowers in the STACR 2020-HQA3 Reference Pool have a non-zero WA (NZWA) original credit score of 752 and a NZWA debt-to-income (DTI) ratio of 36.2%.

Freddie Mac has removed any loan from the Reference Pool that is delinquent or in forbearance as of 6/30/2020, and any loan reported as delinquent or in a forbearance plan through the 15^th business day of July will be removed from the Reference Pool, translating into a prepayment for investors on the deal’s first distribution date. While the transaction is being marketed and issued during the COVID-19 pandemic, none of the structural features of the transaction have been meaningfully modified relative to recent STACR issuance just prior to the occurrence of the COVID-19 pandemic. Due to the fact that the noteholder’s interest payments are not subject to the credit performance of the Reference Obligations, except with respect to Modification Events as discussed in the report, COVID-19 driven liquidity risks for the rated classes are lower relative to subordinate classes in a private label securitization of similar credit quality loans. The expected losses for these classes are higher than for any rated classes pre-COVID due in part to our expectation of increased losses from the COVID-19 pandemic and the related macroeconomic environment.

KBRA’s rating approach incorporated loan-level analysis of the mortgage pool through its Residential Mortgage Default and Loss Model, an examination of the results from third-party loan file due diligence, cash flow modeling analysis of the transaction’s payment structure, reviews of key transaction parties, and an assessment of the transaction’s legal structure and documentation. This analysis is further described in our U.S. RMBS Rating Methodology.

Click here to view the report. To access ratings and relevant documents, click here.

Related Publications

• STACR 2020-HQA3 Tear Sheet
• RMBS KBRA Comparative Analytic Tool (KCAT)
• Residential Mortgage Default and Loss Model
• U.S. RMBS Rating Methodology
• Global Structured Finance Counterparty Methodology
• U.S. RMBS Rating Methodology Assessing Non-QM Risk

   

Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA.

Contacts

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Gary Narvaez, Senior Director (Lead Analyst)

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Thomas Reilly, Analyst

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Patrick Gervais, Managing Director

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Jack Kahan, Senior Managing Director (Rating Committee Chair)

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