Rating Criteria Published For State Housing Finance Agency MBS Pass-Through Bonds

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Fitch Ratings has released a sector-specific report for rating state housing finance agency (SHFA) bonds secured, on a pass-through basis, primarily by mortgage-backed securities (MBS) called “State Housing Finance Agencies: MBS Pass-Through Bond Rating Criteria.” This report will replace the September 2014 state housing finance agency Fitch rating report.

According to the report, these bonds are guaranteed by Ginnie Mae,Fannie Mae‘s mortgage pass-through certificates that will now be referred to as MBS, or MBS guaranteed by Freddie Mac and pledged to the trustee for the holders of the bonds.

The report also identifies three key rating factors considered by Fitch that affect the credit quality of MBS pass-through bonds including, government-sponsored enterprise (GSE) guaranty, transaction and legal analysis, and cash flow.

For the government-sponsored enterprise guaranty rating, Fitch notes that the GSEs as a whole are the primary drivers of this rating’s unconditional guarantee of full and timely payment on the MBS that secures the bonds. Additionally, the performance of the underlying loans or MBS servicer is not factored into the rating on the bonds.

“Each of the GSEs, acting through GSE-approved master servicers, purchases mortgages, assembles them into pools, creates trusts from the pools of mortgages and sells undivided ownership interests in the trusts through issuances of MBS,” the company reported. “The GSEs guarantee timely payment of the interest and principal on the distribution dates for the related MBS, regardless of the performance of the underlying mortgages.”

The transaction and legal analysis rating ensures that documents are reviewed for verification of correct structural features and pass through securities provide an on-time, full payment to bondholders, according to Fitch. This analysis focuses on the pledge of MBS revenues and timing provisions for payment on the underlying MBS. It also reviews the structure of governing the flow of funds, timing of payments, and reserve accounts of bondholders.

“Fitch confirms in the legal documents that MBS principal repayments are passed through to pay or prepay a like amount of principal on the bonds so that, throughout the term of the bonds, the MBS principal amount equals or exceeds the outstanding bond amount,” Fitch said.

In the cash flow analysis rating, Fitch mainly focused on preliminary cash flows that stem from a third party in assigning a rating to determine that the legal document provisions, including the MBS principal amounts, interest rates, timing of payments, fee structure, and sizing of reserves are accurately reflected.

“The cash flows demonstrate payment of scheduled principal and interest on the bonds with no mortgage prepayments as well as with various stressed prepayment assumptions,” Fitch said. “Fitch reviews final cash flows, prepared by a third party following the pricing of the bonds, to verify that projections and assumptions contained in preliminary cash flows and on which Fitch’s rating is based, do not materially differ from the actual MBS deposited into the trust.”

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