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Rating Action:

Moody's assigns definitive ratings to securities issued by Flagstar Mortgage Trust 2018-4

28 Jun 2018

New York, June 28, 2018 -- Moody's Investors Service, ("Moody's") has assigned definitive ratings to 10 senior classes of residential mortgage-backed securities (RMBS) issued by Flagstar Mortgage Trust 2018-4 ("FSMT 2018-4"). The ratings range from Aaa (sf) to Aa2 (sf).

The certificates are backed by a single pool of fixed rate agency eligible high balance (46.80%), conventional agency balance with conforming limits (5.46%), and non-agency jumbo (47.74% of the overall pool) mortgage loans, originated by Flagstar Bank, FSB ("Flagstar"), with an aggregate stated principal balance of $466,934,643.

Flagstar is the servicer of the pool, Wells Fargo Bank, N.A. ("Wells Fargo") is the master servicer and Wilmington Trust, National Association will serve as the trustee.

Servicing compensation in this transaction is based on a fee-for-service incentive structure similar to the Flagstar Mortgage Trust 2018-3INV transaction. The fee-for-service incentive structure includes an initial monthly base servicing fee of $20.50 for all performing loans and increases according to certain delinquent and incentive fee schedules. The Class B-6-C (NR) is first in line to absorb any increase in servicing costs above the base servicing costs. Moreover, the transaction does not have a servicing fee cap.

The complete rating actions are as follows:

Issuer: Flagstar Mortgage Trust 2018-4

Cl. A-1, Definitive Rating Assigned Aa1 (sf)

Cl. A-2, Definitive Rating Assigned Aaa (sf)

Cl. A-3, Definitive Rating Assigned Aaa (sf)

Cl. A-4, Definitive Rating Assigned Aaa (sf)

Cl. A-5, Definitive Rating Assigned Aaa (sf)

Cl. A-6, Definitive Rating Assigned Aaa (sf)

Cl. A-7, Definitive Rating Assigned Aaa (sf)

Cl. A-8, Definitive Rating Assigned Aaa (sf)

Cl. A-9, Definitive Rating Assigned Aaa (sf)

Cl. A-10, Definitive Rating Assigned Aa2 (sf)

RATINGS RATIONALE

Summary credit analysis

We calculated losses on the pool using our US Moody's Individual Loan Analysis (MILAN) model based on the loan-level collateral information as of the cut-off date. Loan-level adjustments to the model results included adjustments to probability of default for higher and lower borrower debt-to-income ratios (DTIs), for borrowers with multiple mortgaged properties, self-employed borrowers, and for the default risk of Homeownership association (HOA) properties in super lien states. Our final loss estimates also incorporate adjustments for originator assessments, third-party review (TPR) scope and results, and the financial strength of representation & warranty (R&W) provider. Our expected loss for this pool in a base case scenario is 0.55% and reaches 7.65% at a stress level consistent with our Aaa (sf) scenario.

Collateral description

The FSMT 2018-4 transaction is a securitization of 750 first lien residential mortgage loans with an unpaid principal balance of $466,934,643. This transaction has approximately three months seasoned loans and strong borrower characteristics. The non-zero weighted-average primary-borrower original FICO score is 767 and the weighted-average original combined loan-to-value ratio (CLTV) is 68.3%. There are however a relatively high percentage of self-employed borrowers (36.6% by loan balance) in the aggregate pool.

Flagstar originated and will service the loans in the transaction. We consider Flagstar an adequate originator and servicer of prime jumbo and conforming mortgages and our loss estimates did not include an adjustment for origination or servicing arrangement quality.

Third-party review and representation & warranties

The compliance, credit, property valuation, and data integrity portion of the third party review (TPR) was conducted on a random sample of loans of 228 loans (30% by loan count). Compared to the Flagstar Mortgage Trust 2018-3INV and Flagstar Mortgage Trust 2018-2 transactions, the sample sized increased from 20% by loan count to 30% by loan count however, compared to Flagstar 2018-1 Mortgage Trust transaction, the sample size of the TPR review is significantly reduced. The sample size was 100% for compliance review and collateral desktop analyses (CDAs) in Flagstar 2018-1 Mortgage Trust. In the areas of credit, valuation and data integrity, the TPR previously covered 332 loans (44% by loan count). With sampling, there is a risk that loans with grade C or grade D issues remain in the pool and that data integrity issues were not corrected prior to securitization for all of the loans in the pool. Moreover, vulnerabilities of the R&W framework, such as the weaker financial strength of the R&W provider, may be amplified due to the limited TPR sample. We made an adjustment to loss levels to account for this risk.

Flagstar, as the originator, makes the loan-level representation and warranties (R&Ws) for the mortgage loans. The loan-level R&Ws are strong and, in general, either meet or exceed the baseline set of credit-neutral R&Ws we have identified for US RMBS. Further, R&W breaches are evaluated by an independent third party using a set of objective criteria. Similar to JPMMT transactions, the transaction contains a "prescriptive" R&W framework. The originator makes comprehensive loan-level R&Ws and an independent reviewer will perform detailed reviews to determine whether any R&Ws were breached when loans become 120 days delinquent, the property is liquidated at a loss above a certain threshold, or the loan is 30 to 119 days delinquent and is modified by the servicer. These reviews are prescriptive in that the transaction documents set forth detailed tests for each R&W that the independent reviewer will perform. However, we made an adjustment to our loss levels to incorporate the weaker financial strength of the R&W provider, which is amplified due to the smaller sample size used in the due diligence review. We also considered in our analysis the materiality tests that may absolve the R&W provider from being required to repurchase the loan. For example, data integrity exceptions within a 10% threshold will not require Flagstar to repurchase a loan, even if such exception causes the loan to fail to comply with the sponsor's underwriting guidelines.

Servicing arrangement

We consider the overall servicing arrangement for this pool to be adequate.

Servicing compensation for loans in this transaction is based on a fee-for-service incentive structure. The fee-for-service incentive structure includes an initial monthly base fee of $20.5 for all performing loans and increases according to certain delinquent and incentive fee schedules. By establishing a base servicing fee for performing loans that increases with the delinquency of loans, the fee-for-service structure aligns monetary incentives to the servicer with the costs of the servicer. The fee-for-service compensation is reasonable and adequate for this transaction. It also better aligns the servicer's costs with the deal's performance and structure. The Class B-6-C (NR) is first in line to absorb any increase in servicing costs above the base servicing costs. Delinquency and incentive fees will be deducted from the Class B-6-C interest payment amount first and could result in interest shortfall to the certificates depending on the magnitude of the delinquency and incentive fees.

Trustee and master servicer

The transaction trustee is Wilmington Trust, National Association. The custodian functions will be performed by Wells Fargo. The paying agent and cash management functions will be performed by Wells Fargo, rather than the trustee. In addition, Wells Fargo, as master servicer, is responsible for servicer oversight, and termination of servicers and for the appointment of successor servicers. In addition, Wells Fargo is obligated to make servicing advances if the servicer is unable to do so.

Tail risk & subordination floor

This deal has a shifting-interest structure, with a subordination floor to protect against losses that occur late in the life of the pool when relatively few loans remain (tail risk). When the total senior subordination is less than 1.25% of the original pool balance, the subordinate bonds do not receive any principal and all principal is then paid to the senior bonds. In addition, if the subordinate percentage drops below 6.25% of current pool balance, the senior distribution amount will include all principal collections and the subordinate principal distribution amount will be zero. The subordinate bonds themselves benefit from a floor. When the total current balance of a given subordinate tranche plus the aggregate balance of the subordinate tranches that are junior to it amount to less than 0.85% of the original pool balance, those tranches do not receive principal distributions. Principal those tranches would have received are directed to pay more senior subordinate bonds pro-rata.

Based on an analysis of scenarios where the largest five to 10 loans in the pool default late in the life of the transaction, we viewed the 1.25% senior floor as credit neutral. We viewed the 0.85% subordination floor as slightly below credit neutral in our rating analysis however close enough where no adjustment was made.

Transaction structure

The securitization has a shifting interest structure that benefits from a senior subordination floor and a subordinate floor. Funds collected, including principal, are first used to make interest payments and then principal payments to the senior bonds, and then interest and principal payments to each subordinate bond. As in all transactions with shifting interest structures, the senior bonds benefit from a cash flow waterfall that allocates all prepayments to the senior bond for a specified period of time, and increasing amounts of prepayments to the subordinate bonds thereafter, but only if loan performance satisfies delinquency and loss tests.

The senior support NAS certificates (Class A-10) will only receive their pro-rata share of scheduled principal payments allocated to the senior bonds for five years, whereas all prepayments allocated to the senior bonds will be paid to the super senior certificates, leading to a faster buildup of super senior credit enhancement. After year five, the senior support NAS bond will receive an increasing share of prepayments in accordance with the shifting percentage schedule.

On or prior to the accretion termination date (the earlier of (1) the distribution date on which Class A-8 has been reduced to zero and (2) the distribution date where the aggregate balance of subordinate certificates has been reduced to zero), the accretion-directed certificate (Class A-8) will be entitled to receive as monthly principal distribution the accrued interest that would otherwise be distributable to the accrual certificate (Class A-9).

All certificates (except Class B-6-C) in this transaction are subject to a net WAC cap. Class B-6-C will accrue interest at the net WAC minus the aggregate delinquent servicing and aggregate incentive servicing fee. For any distribution date, the net WAC will be the greater of (1) zero and (2) the weighted average net mortgage rates minus the capped trust expense rate.

Realized losses are allocated reverse sequentially among the subordinate and senior support certificates and on a pro-rata basis among the super senior certificates.

Exposure to extraordinary expenses

Certain extraordinary trust expenses (such as fees paid to the reviewer, servicing transfer costs) in the FSMT 2018-4 transaction are deducted directly from the available distribution amount. The remaining trust expenses (which have an annual cap of $300,000 per year) are deducted from the net WAC. We believe there is a very low likelihood that the rated certificates in FSMT 2018-4 will incur any losses from extraordinary expenses or indemnification payments from potential future lawsuits against key deal parties. First, the loans are prime quality, 100 percent qualified mortgages and were originated under a regulatory environment that requires tighter controls for originations than pre-crisis, which reduces the likelihood that the loans have defects that could form the basis of a lawsuit. Second, the transaction has reasonably well defined processes in place to identify loans with defects on an ongoing basis. In this transaction, an independent breach reviewer (Inglet Blair, LLC), named at closing must review loans for breaches of representations and warranties when certain clear defined triggers have been breached, which reduces the likelihood that parties will be sued for inaction. Furthermore, the issuer has disclosed the results of a compliance, credit, valuation and data integrity review covering a sample of the mortgage loans by an independent third party (Clayton Services LLC). We did not make an adjustment for extraordinary expenses because most of the trust expenses will reduce the net WAC as opposed to the available funds.

The principal methodology used in these ratings was "Moody's Approach to Rating US Prime RMBS" published in February 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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

Down

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 obligor defaults 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.

Up

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 Moody's 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.

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_1131275.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Jeffrey Han
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
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.
© 2018 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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