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Rating Action:

Moody's assigns definitive ratings to CIM Trust 2019-R2

11 Oct 2019

New York, October 11, 2019 -- Moody's Investors Service ("Moody's") has assigned definitive ratings to eight classes of notes issued by CIM Trust 2019-R2 ("CIM 2019-R2"), which are backed by one pool of primarily re-performing residential mortgage loans. As of the cut-off date of August 31, 2019, the collateral pool is comprised of 3,406 first lien mortgage loans, with a weighted average (WA) updated primary borrower FICO score of 644, a WA current loan-to-value Ratio (LTV) for the first liens of 87.4% and a total unpaid balance of $464,327,419. Approximately 10.6% of the pool balance is non-interest bearing, which consists of both principal reduction alternative (PRA) and non-PRA deferred principal balance.

Rushmore Loan Management Services LLC ("Rushmore") will be the primary servicer and will not advance any principal or interest on the delinquent loans. However, it will be required to advance costs and expenses incurred in connection with a default, delinquency or other event in the performance of its servicing obligations.

The complete rating actions are as follows:

Issuer: CIM Trust 2019-R2

Cl. A1, Definitive Rating Assigned Aaa (sf)

Cl. A1-A, Definitive Rating Assigned Aaa (sf)

Cl. A1-B, Definitive Rating Assigned Aaa (sf)

Cl. B1, Definitive Rating Assigned Ba3 (sf)

Cl. B2, Definitive Rating Assigned B3 (sf)

Cl. M1, Definitive Rating Assigned Aa2 (sf)

Cl. M2, Definitive Rating Assigned A3 (sf)

Cl. M3, Definitive Rating Assigned Baa3 (sf)

RATINGS RATIONALE

Summary Credit Analysis and Rating Rationale

Moody's expected losses on CIM 2019-R2's collateral pool is 14.00% in our base case scenario. Our loss estimates take into account the historical performance of loans that have similar collateral characteristics as the loans in the pool. Our credit opinion is the result of our analysis of a wide array of quantitative and qualitative factors, a review of the third-party review of the pool, servicing framework and the representations and warranties framework.

The methodologies used in these ratings were "Moody's Approach to Rating Securitizations Backed by Non-Performing and Re-Performing Loans" published in February 2019, and "US RMBS Surveillance Methodology" published in February 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Collateral Description

CIM 2019-R2's collateral pool is primarily comprised of re-performing mortgage loans. About 87.0% of mortgage loans in the pool have been previously modified.

We based our expected losses on our estimates of 1) the default rate on the remaining balance of the loans and 2) the principal recovery rate on the defaulted balances. The two factors that most strongly influence a re-performing mortgage loan's likelihood of re-default are the length of time that the loan has performed since a loan modification, and the amount of the reduction in the monthly mortgage payment as a result of the modification. The longer a borrower has been current on a re-performing loan, the less likely the borrower is to re-default. Approximately 43.0% of the borrowers have been current on their payments for at least the past 24 months under the MBA method of calculating delinquencies.

We estimated expected losses for the pool using two approaches -- (1) pool-level approach, and (2) re-performing loan level analysis.

In the pool-level approach, we estimate losses on the pool using an approach similar to our surveillance approach whereby we apply assumptions of future delinquencies, default rates, loss severities and prepayments based on observed performance of similar collateral. We project future annual delinquencies for eight years by applying an initial annual default rate and delinquency burnout factors. Based on the loan characteristics of the pool and the demonstrated pay histories, we expect an annual delinquency rate of 11.5% on the collateral pool for year one. We then calculated future delinquencies on the pool using our default burnout and voluntary conditional prepayment rate (CPR) assumptions. The delinquency burnout factors reflect our future expectations of the economy and the U.S. housing market. We then aggregated the delinquencies and converted them to losses by applying pool-specific lifetime default frequency and loss severity assumptions. Our loss severity assumptions are based off observed severities on liquidated seasoned loans and reflect the lack of principal and interest advancing on the loans.

We also conducted a loan level analysis on CIM 2019-R2's collateral pool. We applied loan-level baseline lifetime propensity to default assumptions and considered the historical performance of seasoned loans with similar collateral characteristics and payment histories. We then adjusted this base default propensity up for (1) loans that have the risk of coupon step-ups and (2) loans with high updated loan to value ratios (LTVs). We applied a higher baseline lifetime default propensity for interest-only loans, using the same adjustments. To calculate the expected loss for the pool, we applied a loan-level loss severity assumption based on the loans' updated estimated LTVs. We further adjusted the loss severity assumption upwards for loans in states that give super-priority status to homeowner association (HOA) liens, to account for potential risk of HOA liens trumping a mortgage.

As of the statistical cut-off date, approximately 10.6% of the pool balance is non-interest bearing, which consists of both PRA and non-PRA deferred principal balance. However, the PRA deferred amount of $673,351 will be carved out as a separate Class PRA note.

For non-PRA forborne amounts, the deferred balance is the full obligation of the borrower and must be paid in full upon (i) sale of property (ii) voluntary payoff or (iii) final scheduled payment date. Upon sale of the property, the servicer therefore could potentially recover some of the deferred amount. For loans that default in future or get modified after the closing date, the servicer may opt for partial or full principal forgiveness to the extent permitted under the servicing agreement. Based on performance and information from servicers, we applied a slightly higher default rate than what we assumed for the overall pool given that these borrowers have experienced past credit events that required loan modification, as opposed to borrowers who have been current and have never been modified. In addition, we assumed approximately 95% severity as the servicer may recover a portion of the deferred balance. Our expected loss does not consider the PRA deferred amount.

Transaction Structure

The securitization has a simple sequential priority of payments structure without any cash flow triggers. The servicer will not advance any principal or interest on delinquent loans. However, the servicer will be required to advance costs and expenses incurred in connection with a default, delinquency or other event in the performance of its servicing obligations. Credit enhancement in this transaction is comprised of subordination provided by mezzanine and junior tranches. To the extent excess cashflow is available, it will be used to pay down additional principal of the bonds sequentially, building overcollateralization.

We ran 96 different loss and prepayment scenarios through our cash flow analysis. The scenarios encompass six loss levels, four loss timing curves, and four prepayment curves.

Third Party Review

The sponsor engaged third party diligence providers to conduct the following due diligence reviews: (i) a title/lien review to confirm the appropriate lien was recorded and the position of the lien and to review for other outstanding liens and the position of those liens; (ii) a state and federal regulatory compliance review on the loans; (iii) a payment history review for the two year period (to the extent available) to confirm that the payment strings matched the data supplied by or on behalf of the third-party sellers; and (iv) a data comparison review on certain characteristics of the loans.

Based on our analysis of the TPR reports, we determined that a portion of the loans with some cited violations are at enhanced risk of having violated TILA through an under-disclosure of the finance charges or other disclosure deficiencies. Although the TPR report indicated that the statute of limitations for borrowers to rescind their loans has already passed, borrowers can still raise these legal claims in defense against foreclosure as a set off or recoupment and win damages that can reduce the amount of the foreclosure proceeds. Such damages can include up to $4,000 in statutory damages, borrowers' legal fees and other actual damages. We increased our base case losses for these loans to account for such damages.

The seller will prepare a schedule based upon the custodian's exception report. The seller will have 90 days to cure any exceptions related to missing mortgages or lost note affidavit. If the seller is unable to cure, then it will repurchase such loans within 90 days. Similarly, if the seller is unable to cure any exceptions related to missing intervening assignments of mortgage and/ or missing intervening endorsements of the note within a year from closing date, then the seller will be obligated to repurchase such loans. The absence of an intervening assignment of mortgage, original note or endorsement can delay or prevent the servicer from foreclosing on the property or could reduce the value of the loan. Similarly other document exceptions can increase the severity upon liquidation.

The diligence provider conducted a review of the title policies, mortgages and lien searches (within twelve months of the cut-off date) on loans with an unpaid principal balance of over $5,000 in the initial pool to confirm the first lien position of the mortgages and to identify other amounts owed on the mortgage. Based on the results title and tax review, we adjusted our expected loss for loans where title search was not performed or loans which were flagged having serious title defects and not indemnified by title insurance. We did not increase losses for any outstanding lien because the remedy provider will extinguish the liens within 150 days of closing date. If the liens are not extinguished, then remedy provider will be obligated to repurchase the loans.

The review also consisted of validating 29 data fields for each loan in the pool which resulted in 2,831 loans having one or more data variances. It was determined that such data variances were attributable to missing or defective source documentation, non-material variances within acceptable tolerances, allocation between documented and undocumented deferred principal balances, timing and data formatting differences. We did not make any adjustments for these findings.

Representations & Warranties (R&W)

The R&W provider is Chimera Funding TRS LLC, wholly-owned subsidiary of Chimera Investment Corporation (NYSE: CIM) and is not an investment grade rated entity. The creditworthiness of the R&W provider determines the probability that the R&W provider will be available and have the financial strength to repurchase defective loans upon identifying a breach. An investment-grade-rated R&W provider lends substantial strength to its R&Ws. For financially weaker entities, we look for other offsetting factors, such as a strong alignment of interest and enforcement mechanisms, to derive the same level of protection. We analyze the impact of less creditworthy R&W providers case by case, in conjunction with other aspects of the transaction.

Mortgage loans will be reviewed for a breach of R&Ws only if one of the following occurs (1) a loan becomes 120 days delinquent (MBA method) or (2) loan has been liquidated and upon such liquidation has incurred a realized loss.

There are a few weaknesses in the enforcement mechanisms. First, the independent reviewer is not identified at closing and, if the owner trustee (on behalf of controlling holder) has difficulty engaging one on acceptable terms, the controlling holder can direct the trustee not to engage one. Furthermore, the review fees, which the trust pays, are not agreed upon at closing and will be determined in the future. Second, the remedies do not cover damages owing to TILA under-disclosures. We made adjustments to account for such damages in our analysis. Finally, there will be no remedy for an insurance-related R&W (i.e. any reduction in the amount paid by a mortgage insurer or title insurer).

Overall, we consider the R&W framework to be relatively stronger compared to recent RPL securitizations rated by us because every seriously delinquent loan is automatically reviewed, there is a well-defined process in place to identify loans with defects on an ongoing basis and the R&Ws do not sunset.

Trustee Indemnification

We believe there is a very low likelihood that the rated notes in CIM 2019-R2 will incur any loss from extraordinary expenses or indemnification payments owing to potential future lawsuits against key deal parties. First, majority of the loans are seasoned with demonstrated payment history, reducing the likelihood of a lawsuit on the basis that the loans have underwriting defects. Second, the transaction has reasonably well-defined processes in place to identify loans with defects on an ongoing basis. In this transaction a well-defined breach discovery and enforcement mechanism reduces the likelihood that parties will be sued for inaction.

Servicing arrangement

Rushmore will servicer 100% of the loans in the pool. In the event of a termination of the Servicer under the Servicing Agreement, a successor servicer that is reasonably acceptable to the Class C holder will be appointed by the Depositor on behalf of the Issuer. In addition, the servicer does not advance principal and interest on delinquent loans in this transaction which would make servicing transfer easier as the replacement servicer will not be obligated to make P&I advances. We consider the overall servicing arrangement to be credit neutral.

Other Considerations

The servicer will not commence foreclosure proceedings on a mortgage loan unless the servicer has notified the Class C holder (which, as of the closing date, will be the sponsor or one of its affiliate) at least five (5) business days in advance of the foreclosure and the Class C holder has not objected to such action. If the Class C holder objects, the servicer has to obtain three appraisals from the appraisal firms as listed in the pooling and servicing agreement. The cost of the appraisals are borne by the Class C holder. The Class C holder will be required to purchase such mortgage loan at a price equal to the highest of the three appraisals plus accrued and unpaid interest on such mortgage loan as of the purchase date. If the servicer cannot obtain three appraisals there are alternate methods for determining the purchase price. If the Class C holder fails to purchase the mortgage loan within the time frame, the Class C holder forfeits any foreclosure rights thereafter. We consider this credit neutral because a) the appraiser is chosen by the servicer from the approved list of appraisers, b) the fair value of the property is decided by the servicer, based on third party appraisals, and c) the Class C holder will pay the fair price and accrued interest.

Transaction Parties

Rushmore will be the primary servicer for all loans in the pool. Wells Fargo Bank, N.A. will act as the custodian. Wells Fargo Bank, N.A., will be the trust administrator, Wilmington Savings Fund Society, FSB will be the owner trustee and U.S. Bank National Association will be the indenture trustee.

Factors that would lead to an upgrade or downgrade of the ratings:

Factors that would lead to an upgrade of the ratings

Levels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline from our original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for better-than-expected performance include changes to servicing practices that enhance collections or refinancing opportunities that result in prepayments.

Factors that would lead to a downgrade of the ratings

Levels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody's original expectations as a result of a higher number of obligors defaulting or deterioration in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1198816.

In rating this transaction, Moody's used a cash flow model to model cash flow stress scenarios to determine the extent to which investors would receive timely payments of interest and principal in the stress scenarios, given the transaction structure and collateral composition.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Chinmay Kulkarni
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Sang Shin
VP-Sr Credit Officer/Manager
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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