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Rating Action:

Moody's assigns provisional ratings to credit risk transfer notes issued by Chase Mortgage Reference Notes, Series 2021-CL1

21 Jul 2021

NOTE: On July 22, 2021 the press release was corrected as follows: The second sentence of the press release was revised to “Chase Mortgage Reference Notes 2021-CL1 is the second credit linked notes transaction issued by JPMorgan Chase Bank, N.A (JPMCB) in 2021 to transfer credit risk to noteholders through a hypothetical tranched credit default swap on a reference pool of mortgages.” Revised release follows.

New York, July 21, 2021 -- Moody's Investors Service, ("Moody's") has assigned provisional ratings to five classes of credit risk transfer notes issued by Chase Mortgage Reference Notes, Series 2021-CL1 (CHASE 2021-CL1) . The ratings range from (P)Aa3 (sf) to (P)B2 (sf).

Chase Mortgage Reference Notes 2021-CL1 is the second credit linked notes transaction issued by JPMorgan Chase Bank, N.A (JPMCB) in 2021 to transfer credit risk to noteholders through a hypothetical tranched credit default swap on a reference pool of mortgages.

Principal payments on the notes are based on the performance of a reference pool consisting of 4,862 fully amortizing fixed-rate prime jumbo non-conforming mortgages with a total balance of $3,237,823,514 with original terms to maturity of 30 years. The notes are uncapped secured overnight financing rate (SOFR) floaters and are unsecured obligations of JPMCB. Unlike principal payment, interest payment to the notes is not dependent on the performance of the reference pool except for loss mitigation modification, as explained below. This deal is unique in that the source of payments for the notes will be JPMCB's own funds, and not the collections on the loans or note proceeds held in a segregated trust account. As a result, we capped the ratings of the notes at JPMCB's Senior Unsecured rating (Aa2).

The credit risk exposure of the notes depends on the actual realized losses and modification losses incurred by the reference pool. This transaction has a pro-rata structure, which is more beneficial to the subordinate bondholders than the shifting interest structure that is typical of prime jumbo transactions. However, the mezzanine and junior bondholders will not receive any principal unless performance tests are satisfied.

The complete rating actions are as follows:

Issuer: Chase Mortgage Reference Notes, Series 2021-CL1

Cl. M-1, Assigned (P)Aa3 (sf)

Cl. M-2, Assigned (P)A3 (sf)

Cl. M-3, Assigned (P)Baa3 (sf)

Cl. M-4, Assigned (P)Ba2 (sf)

Cl. M-5, Assigned (P)B2 (sf)

RATINGS RATIONALE

Summary credit analysis and rating rationale

Moody's expected loss for this pool in a baseline scenario-mean is 0.17%, in a baseline scenario-median is 0.08%, and reaches 1.69% at a stress level consistent with our Aaa ratings.

Today's action reflects the coronavirus pandemic's residual impact on the ongoing performance of US RMBS as the US economy continues on the path toward normalization. Economic activity will continue to strengthen in 2021 because of several factors, including the rollout of vaccines, growing household consumption and an accommodative central bank policy. However, specific sectors and individual businesses will remain weakened by extended pandemic related restrictions.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

We base our ratings on the certificates on the Senior Unsecured rating of JPMCB (Aa2), the credit quality of the mortgage loans, the structural features of the transaction, our assessments of the origination quality and servicing arrangement, the strength of the third-party due diligence, and the eligibility criteria framework of the transaction.

Collateral description

The reference pool consists of 4,862 fully amortizing fixed-rate prime jumbo non-conforming mortgages with a total balance of $3,237,823,514, with original terms to maturity of 30 years. The pool has a weighted average (WA) primary borrower FICO score of 778 and a WA Loan-to-Value (LTV) of 70.2%.

The pool consists of 4,860 (99.96%) Non-QM mortgage loans, and two (0.04%) mortgage loans that are out of scope due to their application date occurring prior to the Qualified Mortgage Rule's effective date. The loans were underwritten to JPMCB underwriting guidelines. The loans are designated non-QM because the QM status was not tested. As part of the origination quality review and in consideration of the loan level third-party diligence reports, we assess whether there are any particular issues that could result in a significant risk because these loans are non-QM. We did not make any adjustments to the loss levels because the borrowers are prime borrowers. They have the ability to pay, based on their financial assets and reserves. In addition, the third party review firm checked for ATR compliance for a sample of the loans as part of due diligence on the collateral pool and did not find any issues.

Modified loans: About 30.5% of the pool are loans that were modified. We did not make any adjustments to the loss levels because the modifications were relationship modifications offered to clients for retention purposes, and were heavily offered in 2019 and 2020 to align coupon rates on seasoned mortgages with the market rate. The borrowers are prime borrowers with financial assets and reserves and had been current on their mortgage payments before the modification.

Origination quality

The mortgage loans in the collateral pool were underwritten in accordance with JPMCB prime jumbo underwriting guidelines. We consider JPMCB an adequate originator of prime jumbo and we did not make an adjustment to the loss levels.

JPMCB originates and purchases prime jumbo residential mortgage loans through its retail and correspondent channels. The retail channel is made up of two divisions, Field Sales and Centralized Sales, which is collectively referred to as the Consumer channel. Field Sales, is made up of a large branch network with traditional loan officers. Centralized Sales is based out of a large call center and handles telephone and web-based mortgage loan leads and applications. JPMCB currently has mortgage processing and underwriting operations in multiple states. It also has off-shore sites in the Philippines that perform some loan processing and risk analytics tasks.

Underwriting

JPMCB has thorough and strict underwriting guidelines. Any exceptions to the guidelines must be documented with all the compensating factors before approval. The underwriters review documentation and analyze income, assets and liabilities. JPMCB's underwriters are highly experienced -- they have an average of 11 years of experience in the industry of which approximately 7 years have been with JPMCB for the Consumer channel. The correspondent channel underwriters have 10 years industry experience and 5 years JPMCB tenure. The underwriting department is highly structured with departments by channel, specialty, and quality control.

Quality assurance, which conducts monthly post-closing loan level quality control reviews, reports to the Mortgage Banking Chief Risk Officer, which ultimately reports to the Chief Risk Officer of JPM Chase Bank. Quality assurance delivers results to production management to initiate and monitor corrective action plans in response to adverse findings. Every month, quality assurance forwards audit findings to management that include trending analysis and observations.

Servicing arrangement

We consider the overall servicing arrangement for this pool adequate because of the experience and financial strength of JPMCB as the servicer. JPMCB is not required to advance principal and interest on the mortgage loans, but JPMCB is responsible to pay interest to the notes at their respective note rates. JPMCB will be obligated to make advances with respect to taxes, insurance premiums and the cost of the property's preservation if deemed recoverable. JPMCB is a seasoned servicer with more than 20 years of experience servicing residential mortgage loans and has demonstrated adequate servicing ability as a primary servicer of prime residential mortgage loans.

Third-party review

Review Vendor A reviewed a sample of 1,528 loans out of a total of 4,862 loans in this transaction for compliance and title. Review Vendor B reviewed 349 out of a total of 4,862 loans in this transaction for credit, compliance and valuation and 220 loans for title. The TPR results from Review Vendor B indicated compliance with the originators' underwriting guidelines for majority of loans, no material compliance issues and no material appraisal defects.

Overall, the loans from Review Vendor B that had exceptions to the originators' underwriting guidelines had strong documented compensating factors such as low LTVs, high reserves, high FICOs, or clean payment histories. Review Vendor B also identified minor compliance exceptions for reasons such as inadequate RESPA disclosures (which do not have assignee liability) and TILA/RESPA Integrated Disclosure (TRID) violations related to fees that were out of variance but then were cured and disclosed. In addition, the data integrity review from Review Vendor B was on the full tape including the original LTV and FICO.

Scope of Review: Review Vendor A reviewed a sample of 1,528 loans out of a total of 4,862 loans in this transaction for compliance and title. Review Vendor A also reviewed 1,748 loans for payment history and servicing comments. Review Vendor A's TPR scope for this transaction did not cover credit review and valuation review. The loans backing the pool are highly seasoned with an average seasoning of 68 months.

On the credit review, the performance history for highly seasoned loans provides more insight into the credit quality of the loans than underwriting factors such as borrower income, assets, and employment at the time of origination. Review Vendor A reviewed the payment history which ranged from 30-64 months for 1,748 mortgage loans out of which 1,740 (99.54%) loans had no delinquencies. 8 mortgage loans (0.46%) showed evidence of one or more delinquencies during the lookback period. All of the mortgage loans in the pool have at least a 36- month clean payment history.

On the valuation review, we did not adjust our loss expectations due to the lack of a property valuation review because (1) every loan has an original appraisal and there is an eligibility criterion from JPMCB that each property is undamaged by certain natural events that would materially and adversely affect the value of the property as security for the loan at the time of closing, (2) the issuer provided updated AVMs and BPOs on 100% of the properties backing mortgages in this pool, with the exception of 10 loans with an original LTV below 55%, and (3) all loans were originated and serviced by JPMCB.

Compliance review: The regulatory compliance review consisted of a review of compliance with the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) among other federal, state and local regulations. A TILA-RESPA Integrated Disclosure Rule (TRID) review was also performed for loans originated on October 3, 2015, or later. Two loans had a final compliance D because of missing HUD-1 addendum. JPMCB removed these two loans from the final pool. The other identified compliance issues were primarily related to minor TILA or TRID exceptions. We did not make any adjustments to our credit enhancement due to regulatory compliance issues because we do not deem the compliance exceptions to be material.

Title review and tax lien: Review Vendor A reviewed a sample of 1,528 loans out of a total of 4,862 loans in this transaction for title. The title review includes confirming the recordation status of the mortgage and the intervening chain of assignments, the status of real estate taxes, and validating the lien position of the underlying mortgage loan. As a result of the title/lien review, no loans were found to have any major issues.

Data integrity: Review Vendor A performed Data integrity on a sample of 1,528 loans out of a total of 4,862 loans. The data integrity scope did not include FICO and LTV validation. However, we did not make adjustments due to the following mitigants: (1) JPMCB originated and serviced 100% of the loans in the pool since its origination. (2) JPMCB has eligibility criteria that the original FICO and appraised value on the data tape will correspond to the original loan files, and (3) the private placement memorandum will disclose stratification of key fields in the data tape including the original FICO and LTV.

Transparent Eligibility Criteria framework:

JPMCB has provided clear loan-level eligibility criteria with respect to the reference pool. There are provisions for binding arbitration in the event there is a dispute between the issuer and a representative appointed by the noteholders, regarding satisfaction of the eligibility criteria. Further, eligibility criteria breaches are evaluated by an independent third-party using a set of objective criteria. The transaction contains breach review triggers: (i) a severely delinquent reference obligation, (ii) a liquidated reference obligation, or (iii) a delinquent modified reference obligation. Of note, CHASE 2021-CL1's eligibility criteria excludes certain credit and underwriting eligibility criteria because the loans backing this pool are highly seasoned and the loans have a clean payment history for 36 months or since origination.

The notes

JPMCB creates a hypothetical structure of senior reference certificates (A-R1) and multiple classes of subordinate reference certificates (M-R1, M-R2, M-R3, M-R4, M-R5 and B-R1). The principal payments and losses on the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class B notes will be based on the principal amounts and losses that would hypothetically be based on the Class M-R1, Class M-R2, Class M-R3, Class M-R4, Class M-R5 and Class B-R1 certificates, respectively, included in the hypothetical structure.

Transaction structure

Credit enhancement in this transaction is comprised of subordination provided by mezzanine and junior tranches. Realized losses are allocated in a reverse sequential order starting with the Class B tranche.

Interest due on the notes is determined by the outstanding principal balance and the interest rate of the notes. The interest payment amount is the interest accrual amount of a class of notes minus any modification loss amount allocated to such class on each payment date. Of note, relationship modification is not part of the modification loss amount. The modification loss is calculated by taking the respective positive and negative difference between the original accrual rate of the loans, multiplied by the unpaid balance of the loans, and the current accrual rate of the loans, multiplied by the interest bearing unpaid balance.

Principal payments will be allocated pro rata among the senior and subordinate notes (mezzanine and junior) based on their respective senior and subordinate percentages so long as performance triggers and nonperforming loan test are satisfied. The senior note will receive 100% of the principal distributions if either the delinquent trigger or the cumulative loss trigger fails during the payment period. The senior will receive 100% of the prepayment or unscheduled payment if the nonperforming loan test fails during the payment period.

Realized Loss and Modification Loss

Realized losses are applied reverse sequentially starting with first with Class B until the principal balance has been reduced to zero. Modification loss will be applied after the allocation of realized loss.

Modification loss amounts are applied reverse sequentially first to the distributable interest and principal of the Class B to reduce the current interest distributable to zero and then to reduce the principal distributable to zero.

Of note, any principal forbearance/forgiveness amount created in connection with any modification (whether as a result of a COVID-19 forbearance or otherwise) will result in the allocation of modification loss. Modifications performed in accordance with the loss mitigation process of the servicer will not result in the allocation of realized losses or certificate write-down amount unless the borrower receives a principal forgiveness or the modified borrower defaults without enough liquidation proceeds to cover the unpaid principal balance.

Cash flow features

We took the pro rata principal payments to the notes and performance triggers into consideration in our cash flow analysis. We applied a 20% CPR to the cash flow as a sensitivity for the pro rata feature. In a high prepayment environment, the senior and the subordinate notes are amortizing faster. As a result, less subordination will be available to protect the senior subordinate certificates from losses.

Tail risk

This deal has a pro-rata structure with a subordination lockout class, which protects the mezzanines of high priority if the applicable credit support percentage levels are not maintained. The mezzanine and junior bondholders will not receive any principal unless performance tests are satisfied. The mezzanine and junior notes will be locked out of principal payment entirely if the current applicable credit percentage for such class is less than the sum of its original applicable credit percentage and 25% of the nonperforming reference loan percentage. The principal those tranches would have received are directed to pay more senior subordinate bonds pro rata.

In addition, the transaction has a subordination floor of 0.20% of the original pool balance to protect the subordinate notes against losses that occur late in the life of the pool. The floor is consistent with the credit neutral floor for the assigned ratings according to our 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 of the subordinate bonds 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.

Methodology

The principal methodology used in these ratings was "Moody's Approach to Rating US RMBS Using the MILAN Framework" published in April 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1201303. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Please note that a Request for Comment was published in which Moody's requested market feedback on potential revisions to one or more of the methodologies used in determining these Credit Ratings. If the revised methodologies are implemented as proposed, it is not currently expected that the Credit Ratings referenced in this press release will be affected. Request for Comments can be found on the rating methodologies page on www.moodys.com.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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, 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Max Sauray
Vice President - Senior 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

Padma Rajagopal
Vice President - Senior Analyst
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.
© 2021 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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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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