Fitch Expects to Rate Mill City Mortgage Loan Trust 2015-1; Presale Issued

The following is from Fitch Ratings on November 17:

Fitch Ratings expects to rate Mill City Mortgage Loan Trust 2015-1 (MCMT 2015-1) as follows:

--$100,000,000 class A1 notes 'AAAsf'; Outlook Stable;

--$75,000,000 class A2 notes 'AAAsf'; Outlook Stable;

--$75,000,000 class A3 notes 'AAAsf'; Outlook Stable;

--$39,236,000 class A4 notes 'AAAsf'; Outlook Stable;

--$100,000,000 class AX1 notional notes 'AAAsf'; Outlook Stable;

--$75,000,000 class AX2 notional notes 'AAAsf'; Outlook Stable;

--$75,000,000 class AX3 notional notes 'AAAsf'; Outlook Stable;

--$39,236,000 class AX4 notional notes 'AAAsf'; Outlook Stable;

--$37,933,000 class M1 notes 'AAsf'; Outlook Stable;

--$27,976,000 class M2 notes 'Asf'; Outlook Stable;

--$25,604,000 class M3 notes 'BBBsf'; Outlook Stable;

--$22,286,000 class B1 notes 'BBsf'; Outlook Stable;

--$15,884,000 class B2 notes 'Bsf'; Outlook Stable;

--$189,236,000 class A5 exchangeable notes 'AAAsf'; Outlook Stable;

--$114,236,000 class A6 exchangeable notes 'AAAsf'; Outlook Stable;

--$75,000,000 class A7 exchangeable notes 'AAAsf'; Outlook Stable;

--$75,000,000 class A8 exchangeable notes 'AAAsf'; Outlook Stable;

--$39,236,000 class A9 exchangeable notes 'AAAsf'; Outlook Stable;

--$189,236,000 class A10 exchangeable notes 'AAAsf'; Outlook Stable;

--$114,236,000 class A11 exchangeable notes 'AAAsf'; Outlook Stable;

--$227,169,000 class A12 exchangeable notes 'AAsf'; Outlook Stable;

--$152,169,000 class A13 exchangeable notes 'AAsf'; Outlook Stable;

--$77,169,000 class A14 exchangeable notes 'AAsf'; Outlook Stable;

--$255,145,000 class A15 exchangeable notes 'Asf'; Outlook Stable;

--$180,145,000 class A16 exchangeable notes 'Asf'; Outlook Stable;

--$105,145,000 class A17 exchangeable notes 'Asf'; Outlook Stable;

--$280,749,000 class A18 exchangeable notes 'BBBsf'; Outlook Stable;

--$205,749,000 class A19 exchangeable notes 'BBBsf'; Outlook Stable;

--$130,749,000 class A20 exchangeable notes 'BBBsf'; Outlook Stable;

--$289,236,000 class AX5 notional notes 'AAAsf'; Outlook Stable;

--$91,513,000 class MA exchangeable notes 'BBBsf'; Outlook Stable;

--$53,580,000 class MB exchangeable notes 'BBBsf'; Outlook Stable.

The following classes will not be rated by Fitch:

--$27,738,000 class B3 notes;

--$27,502,004 class B4 notes.

The notes are supported by one collateral group which consisted of 1,369 re-performing mortgages with a total balance of approximately $474.16 million (which includes $6.6 million, or 1.4 percent, of the aggregate pool balance in non-interest-bearing deferred principal amounts) as of the cut-off date.

The 'AAAsf' rating on the senior notes reflects the 39.00 percent subordination provided by the 8.00 percent class M1, 5.90 percent class M2, 5.40 percent class M3, 4.70 percent class B1, 3.35 percent class B2, 5.85 percent class B3 and 5.80 percent class B4 notes.

Fitch's ratings on the class notes reflect the credit attributes of the underlying collateral, the quality of the servicers, Shellpoint Mortgage Servicing and Fay Servicing LLC. (rated 'RSS3+' and 'RSS3' by Fitch respectively) and the representation (rep) and warranty framework, minimal due diligence findings and the sequential pay structure.

KEY RATING DRIVERS

Modified Performing Loans: The pool consists of peak-vintage re-performing loans (RPLs), 90 percent of which have been modified. Roughly 10 percent (137 loans) has deferred amounts averaging $48,000. Fitch received 36-month pay strings on all loans with 27 percent having experienced a delinquency in the past 36 months and 6 percent of loans experiencing a delinquency in the past 24 months. The weighted average credit score of 707 and current loan-to-value ratio of 81 percent is positive relative to recent RPL transactions rated by Fitch.

High Cost Loans: The due diligence review identified one loan as high cost and potentially subject to assignee liability. Fitch assigned a loss severity (LS) of 200 percent to this loan. Another 55 loans were missing documentation where high cost testing was indeterminable. All but four received an upwards LS revision to account for the potential risk of truth in lending (TIL) violations. The upwards revision was determined by applying Fitch's assumptions for non-QM loans as damages and legal costs are similar for foreclosure challenges. The remaining four are located in a high cost state on and designated by Freddie Mac' as high risk list for assignee liability. Fitch assigned a 100 percent LS to these loans to account for potential additional damages at the state level.

No Servicer P&I Advances: The servicer will not be advancing delinquent monthly payments of principal and interest (P&I). As P&I advances made on behalf of loans that become delinquent and eventually liquidate reduce liquidation proceeds to the trust, the loan-level (LS) are less for this transaction than for those where the servicer is obligated to advance P&I. Structural provisions and cash flow priorities, together with increased subordination, provide for timely payments of interest to the 'AAAsf' and 'AAsf' rated classes.

Sequential-Pay Structure: The transaction's cash flow is based on a sequential-pay structure, whereby the subordinate classes do not receive principal until the senior classes are repaid in full. Losses are allocated in reverse-sequential order. Furthermore, the provision to re-allocate principal to pay interest on the 'AAAsf' and 'AAsf' rated notes prior to other principal distributions is highly supportive of timely interest payments to those classes, in the absence of servicer advancing.

Potential Interest Deferrals: To address the lack of an external P&I advance mechanism, principal otherwise distributable to the notes may be used to pay monthly interest. Principal is available to pay interest on notes. As a result, bonds may experience long periods of interest deferral that will generally not be repaid until such note becomes the most senior outstanding.

Under Fitch's 'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions,' dated May 2014, the agency may assign ratings of up to 'Asf' on notes that incur deferrals if such deferrals are permitted under terms of the transaction documents, provided such amounts are fully recovered with interest accrued thereon prior to legal final maturity under the relevant rating stress.

Limited Life of Rep Provider: CVI CVF II Lux Master S.a.r.l., as rep provider, will only be obligated to repurchase a loan due to breaches through December 2016. Thereafter, a reserve fund will be available to cover amounts due to noteholders for loans identified as having rep breaches. Amounts on deposit in the reserve fund, as well as the increased level of subordination, will be available to cover additional defaults and losses resulting from rep weaknesses or breaches occurring after December 2016.

Tier 2 Representation Framework: Fitch generally considers the representation, warranty and enforcement (RW&E) mechanism construct for this transaction to be generally consistent with a

Tier 2 framework due to the inclusion of knowledge qualifiers and the exclusion of loans from certain reps as a result of third-party due diligence findings. Thus, Fitch increased its 'AAAsf' loss expectations by approximately 226 bps to account for a potential increase in defaults and losses arising from weaknesses in the reps.

Timing of Recordation and Document Remediation: An updated title and tax search, as well as a review to confirm that the mortgage and subsequent assignments were recorded in the relevant local jurisdiction, was also performed. The review confirmed that all mortgages and subsequent assignments were recorded in the relevant local jurisdiction or were in the process of being recorded.

While the expected timelines for recordation and remediation are viewed by Fitch as reasonable, the obligation of CVI CVF II Lux Master S.a.r.l. to repurchase loans, for which assignments are not recorded and endorsements are not completed by the payment date in December 2016, aligns the issuer's interests regarding completing the recordation process with those of noteholders. While there will not be an asset manager in this transaction, the indenture trustee will be reviewing the custodian reports. The indenture trustee will request CVI CVF II Lux Master S.a.r.l. to purchase any loans with outstanding assignment and endorsement issues two days prior to the December 2016 payment date.

PD Adjustment for Clean Current Loans: Fitch's analysis of the performance of clean current loans found that, for these loans, its loan loss model projected probability of defaults (PDs) that were more punitive than indicated by Fitch's roll rate projections. To account for this, Fitch reduced the lifetime default expectations by approximately 16.7 percent for the loans that have a clean payment history for at least the past 24 months.

Deferred Amounts: Non-interest-bearing principal forbearance amounts totaling $6.58 million (1.4 percent of the unpaid principal balance [UPB]) are outstanding on 137 loans. Fitch included the deferred amounts when calculating the borrower's LTV and sLTV, despite the lower payment and amounts not being owed during the term of the loan. The inclusion resulted in higher PDs and LS than if there were no deferrals. Fitch believes that borrower default behavior will resemble that of the higher LTVs, including the deferred balances, as exit strategies (i.e. sale or refinancing) will be limited relative to those borrowers with more equity in the property.

Bulk Sale Rights: On the first payment date in which the aggregate pool balance is less than 20 percent of the initial balance, the controlling holder will have the option to have the issuer sell the remaining loans in total as long as the proceeds are not less than the minimum price. The minimum price is set as the greater of the fair value price of all remaining loans (including any fees) and the outstanding class principal balance.

RATING SENSITIVITIES

Fitch's analysis incorporates sensitivity analyses to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at both the metropolitan statistical area (MSA) and national levels. The implied rating sensitivities are only an indication of some of the potential outcomes and do not consider other risk factors that the transaction may become exposed to or be considered in the surveillance of the transaction.

Fitch conducted sensitivity analysis determining how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10 percent, 20 percent, and 30 percent, in addition to the model-projected 8.9 percent. The analysis indicates there is some potential rating migration with higher MVDs, compared with the model projection.

Fitch also conducted sensitivities to determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'.

DUE DILIGENCE USAGE

Fitch was provided with due diligence information from JCIII & Associates (JCIII) and Meridian Asset Services (Meridian). The due diligence focused on regulatory compliance, pay history, the presence of key documents in the loan file and data integrity. In addition, Meridian was retained to perform an updated title and tax search, as well as a review to confirm that the mortgage and subsequent assignments were recorded in the relevant local jurisdictions.

Form 15E has also been received from JCIII in regards to the work performed for this transaction.

Fitch considered this information in its analysis and based on the findings, Fitch made minor adjustments to its analysis. 166 loans were found to have an exception due to missing modification documents or a missing signature on modification documents. For these loans, timelines were extended by an additional three months.

Additional information is available at fitchratings.com.

Mill City Mortgage Loan Trust 2015-1https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873740

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Rating Criteria for U.S. Residential and Small Balance Commercial Mortgage Servicers (pub. 23 Apr 2015)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864368

U.S. RMBS Cash Flow Analysis Criteria (pub. 06 Apr 2015)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863973

U.S. RMBS Loan Loss Model Criteria (pub. 03 Aug 2015)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868923

U.S. RMBS Master Rating Criteria (pub. 01 Oct 2015)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870427

U.S. RMBS Surveillance and Re-REMIC Criteria (pub. 01 Jun 2015)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866259

US RMBS Re-Performing Loan Criteria (pub. 21 Nov 2014)https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=811488

Related Research

Mill City Mortgage Loan Trust 2015-1 - Appendixhttps://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873790

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994247

ABS Due Diligence Form 15E 1https://fitchratings.com/creditdesk/press_releases/content/ridf15E_frame.cfm?pr_id=994247&flm_nm=15e_994247_1.pdf

Solicitation Statushttps://fitchratings.com/gws/en/disclosure/solicitation?pr_id=994247

Endorsement Policyhttps://fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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