You are on page 1of 37

Structured Finance

RMBS / U.S.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


Freddie Mac Risk Transfer Transaction
Presale Report
Capital Structure

Inside This Report


Page
1
1
2
3
3
6
8
13
13
14

Transaction Summary
Key Rating Drivers
Additional Rating Drivers
Transaction Overview
Transaction Structure
Asset Analysis
Transaction Comparison
Third-Party Due Diligence Review
Aggregator Review Analysis
Servicers and Master Servicer
Mortgage Loan Representations
and Warranties
Financial Structure, Credit Enhancement
and Cash Flow Analysis
Counterparty Risk
Transaction and Legal Structure
Model, Criteria Application and
Data Adequacy
Performance Analytics
Appendix A: Aggregator
Appendix B: Servicers
Appendix C: Rating Sensitivity
Appendix D: Third-Party Due Diligence
Appendix E: Exchangeable Notes
Appendix F: Transaction Overview

15
17
19
19
20
20
21
29
32
33
35
36

Related Criteria
Global Rating Criteria for Single- and MultiName Credit-Linked Notes (March 2015)
Global Structured Finance Rating Criteria
(July 2015)
Counterparty Criteria for Structured
Finance
and
Covered
Bonds
(May 2014)
U.S. RMBS Master
(October 2015)

Rating

Criteria

U.S. RMBS Loan Loss Model Criteria


(August 2015)
U.S. RMBS Cash Flow Analysis Criteria
(April 2015)
Rating Criteria for U.S. Residential and
Small Balance Commercial Mortgage
Servicers (April 2015)
U.S. RMBS Surveillance and Re-Remic
Criteria (June 2015)

Expected Expected
Amount
Interest
Class
Rating
Outlook
($ Mil.)
CE (%)
Rate (%)
Final Maturity
TT (%)
TTLM (x)
a
A-H
NR
N.A.
33,937.85
5.00
N.A.
N.A.
95.00
118.75
b
M-1
BBBsf
Stable
252.00
3.95
TBD
July 2028
1.05
1.31
a
M-1H
NR
N.A.
123.10
3.95
N.A.
N.A.
1.05
1.31
b
BBBsf
M-2
Stable
240.00
2.95
TBD
July 2028
1.00
1.25
a
M-2H
NR
N.A.
117.24
2.95
N.A.
N.A.
1.00
1.25
b
M-3
Bsf
Stable
468.00
1.00
TBD
July 2028
1.95
2.44
M-3Ha
NR
N.A.
228.62
1.00
N.A.
N.A.
1.95
2.44
B
NR
N.A.
36.00
0.00
TBD
July 2028
1.00
1.25
B-Ha
NR
N.A.
321.24
0.00
N.A.
N.A.
1.00
1.25
Total
35,724.06
Expected ratings do not reflect final ratings and are based on information provided by the issuer as of Jan. 5, 2016. These expected
ratings are contingent on final documents conforming to information already received. Ratings are not a recommendation to buy,
sell or hold any security. The offering circular and other material should be reviewed prior to any purchase. aClasses A-H,
M-1H, M-2H, M-3H, and B-H are reference tranches only. These classes are not issued or sold. The risk is retained by Freddie
Mac. bOriginal notes, which can be exchanged for modifications and combinations (MAC) notes. See Appendix E for more
information on MAC notes and exchangeable combinations. CE Credit enhancement. NR Not rated. N.A. Not applicable.
TBD To be determined. Tranche-thickness loss multiple (TTLM) is calculated using the Bsf expected loss assumption.

Transaction Summary
Fitch Ratings expects to rate the M-1, M-2, and M-3 notes for Freddie Macs Structured Agency
Credit Risk Debt Notes, Series 2016-DNA1 (STACR Series 2016-DNA1), as listed above. This
is Freddie Macs sixth actual loss severity (LS) risk transfer. The notes are general unsecured
obligations of Freddie Mac (AAA/Stable) but are subject to the credit and repayment risk of a
pool of certain residential mortgage loans (reference pool) held in various Freddie Macguaranteed mortgage-backed securities (MBS).
While the transaction structure simulates the behavior and credit risk of traditional RMBS
senior/subordinate securities, Freddie Mac will be responsible for making monthly payments of interest
and principal to investors based on the payment priorities set forth in the transaction documents.
Given the structure and counterparty dependence on Freddie Mac, Fitchs rating on the M-1, M-2,
and M-3 notes, along with their corresponding modifications and combinations (MAC) notes, will be
based on the lower of: the quality of the mortgage loan reference pool and credit enhancement (CE)
available through subordination; or Freddie Macs issuer default rating (IDR). The notes are issued
as uncapped LIBOR-based floaters and have 12.5-year legal final maturities.

Key Rating Drivers

Analysts
Rachel Noonan
+1 212 908-0224
rachel.noonan@fitchratings.com

High Quality Mortgage Pool: The reference mortgage loan pool consists of 144,144 high
quality mortgage loans totaling $35.7 billion that were acquired by Freddie Mac between April 1,
2015 and June 30, 2015. The pool consists of loans with original loan-to-value ratios (LTVs) of
over 60% and less than or equal to 80% with a weighted average (WA) original combined LTV
of 76%. The WA debt-to-income (DTI) ratio of 35% and credit score of 754 reflect the strong
credit profile of post-crisis mortgage originations.

Ryan OLoughlin
+1 212 908-0387
ryan.oloughlin@fitchratings.com
Suzanne Mistretta
+1 212 908-0639
suzanne.mistretta@fitchratings.com

www.fitchratings.com

January 7, 2016

Structured Finance
Additional Rating Drivers
Actual Loss Severities: This will be Freddie Macs sixth actual loss risk transfer transaction in
which losses borne by the noteholders will not be based on a fixed LS schedule. The notes in
this transaction will experience losses realized at the time of liquidation, which will include both
lost principal and delinquent interest. Fitchs model LS for the BBBsf and BBBsf rating
scenarios of roughly 36% and 34%, respectively, approximate the average fixed LS schedule
of about 36% and 35%, respectively.
12.5-Year Hard Maturity: M-1, M-2, and M-3 notes benefit from a 12.5-year legal final maturity
as opposed to the 10-year maturity seen in prior fixed LS STACRs. Thus, any credit events on
the reference pool that occur beyond year 12.5 are borne by Freddie Mac and do not affect the
transaction. In addition, credit events that occur prior to maturity with losses realized from
liquidations that occur after the final maturity date will not be passed through to noteholders.
This feature more closely aligns the risk of loss to that of the 10-year, fixed LS STACRs where
losses were passed through when a credit event occurred i.e. loans became 180 days
delinquent with no consideration for liquidation timelines. The credit ranged from 8% at the Asf
rating category to 14% at the Bsf rating category.
Solid Lender Review and Acquisition Processes: Fitch found that Freddie Mac has a wellestablished and disciplined process in place for the purchase of loans and views its lenderapproval and oversight processes for minimizing counterparty risk and ensuring sound loan
quality acquisitions as positive. Loan quality control (QC) review processes are thorough and
indicate a tight control environment that limits origination risk. Fitch has determined Freddie
Mac to be an above-average aggregator for its 2013 and later product. The lower risk was
accounted for by Fitch by applying a lower default estimate for the reference pool.
Advantageous Payment Priority: The payment priority of the M-1 class will result in a shorter
life and more stable CE than mezzanine classes in private-label (PL) RMBS, providing a
relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full prorata share of the pools unscheduled principal payment until year 10, the M-1 class can receive
a full pro-rata share of unscheduled principal immediately, as long as a minimum CE level is
maintained, the cumulative net loss is within a certain threshold and the delinquency test is
within a certain threshold. Additionally, unlike PL mezzanine classes, which lose subordination
over time due to scheduled principal payments to more junior classes, the M-2, M-3, and B
classes will not receive any scheduled or unscheduled principal allocations until the M-1 class
is paid in full. The B class will not receive any scheduled or unscheduled principal allocations
until the M-3 class is paid in full.

Related Research
Insights into Freddie Mac Loan Loss
Data (February 2015)
Fitch Affirms Fannie Mae and Freddie
Mac Ratings Following U.S. Sovereign
Action; Outlook Stable (April 2015)
GSE Mortgage Credit Risk Analysis
(July 2013)
U.S. Housing Finance GSEs Fannie
Mae and Freddie Mac (May 2015)
Representations,
Warranties,
and
Enforcement Mechanisms in Global
Structured
Finance
Transactions
(June 2015)

Solid Alignment of Interests: While the transaction is designed to transfer credit risk to
private investors, Fitch believes the transaction benefits from a solid alignment of interests.
Freddie Mac will retain credit risk in the transaction by holding the senior reference tranche A-H,
which has 5% of loss protection, as well as a minimum of 50% of the first-loss B tranche, sized
at 100 bps. Initially, Freddie Mac will retain an approximately 33% vertical slice/interest in the
M-1, M-2, and M-3 tranches.
Receivership Risk Considered: Under the Federal Housing Finance Regulatory Reform Act,
the Federal Housing Finance Agency (FHFA) must place Freddie Mac into receivership if it
determines that the government-sponsored enterprises (GSE) assets are less than its
obligations for longer than 60 days following the deadline of its SEC filing. As receiver, FHFA
could repudiate any contract entered into by Freddie Mac if it is determined that such action
would promote an orderly administration of Freddie Macs affairs. Fitch believes that the U.S.
government will continue to support Freddie Mac, as reflected in its current rating of the GSE.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
However, if, at some point, Fitch views the support as being reduced and receivership likely,
the rating of Freddie Mac could be downgraded and ratings on the M-1, M-2, and M-3 notes,
along with their corresponding MAC notes, could be affected.

Transaction Overview
STACR 2016-DNA1 represents Freddie Macs sixth risk transfer transaction applying actual
loan LS to a reference pool and is in line with FHFAs conservatorship strategic plan for
20132017. Under this plan, each enterprise needs to demonstrate the viability of multiple
types of risk transfer transactions involving single-family mortgages. Overall, this transaction
employs a similar structure as prior STACR transactions.
The objective of the transaction is to transfer credit risk from Freddie Mac to private investors
with respect to a $35.7 billion pool of mortgage loans currently held in previously issued MBS
guaranteed by Freddie Mac. The transaction effectively mimics a credit-linked note structure
with the principal repayment of the notes subject to the performance of a reference pool of
mortgage loans. As loans liquidate or other credit events occur, the outstanding principal
balance of the debt notes will be reduced by the actual loans LS percentage related to those
credit events, which includes the borrowers delinquent interest.
While the transaction repayment profile is linked to the performance of the reference pool, the
notes issued are unsecured obligations of Freddie Mac and have the same priority as all its
other unsecured and unsubordinated debt. Freddie Mac continues to operate its business
under conservatorship and the direction of FHFA, its regulator. Ratings of both Fannie Mae and
Freddie Mac are directly linked to the U.S. sovereign rating, based on Fitchs view of the U.S.
governments direct financial support of the two housing GSEs. If, at some point in the future,
Fitch views the strength of support as being reduced, Freddie Macs ratings may be de-linked
from the sovereigns and downgraded.
The actual cash flows from the reference pool will not be paid to holders of the notes, but,
rather, Freddie Mac will make monthly payments of accrued interest and periodic payments of
principal to noteholders based on payment priorities set forth in the transactions governing
documents. If Freddie Mac is placed into receivership or defaults on its senior unsecured
obligations, investors in M-1, M-2, M-3, and B notes will not have recourse to the reference
pool, and recoveries on outstanding notes will be on par with other outstanding senior
unsecured obligations (subject to performance of the reference pool).

Transaction Structure
Unscheduled principal will be paid pro rata to
subordinated classes as long as the senior
reference tranche has a CE of 5.50%, and the
cumulative net loss test and delinquency test are
satisfied.

The STACR 2016-DNA1 debt notes will be subject to the performance of the mortgage loans
included in the reference pool (reference obligations) and, as such, are intended to simulate the
repayment behavior and credit risk of a PL U.S. RMBS bond.
Classes A-H, M-1H, M-2H, M-3H, and B-H are reference tranches and have a notional amount
only for calculating principal and credit event allocations as they relate to the mortgage loans
comprising the reference pool. Class M-1, M-2, M-3, and B notes correspond to class M-1H,
M-2H, M-3H, and B-H reference tranches and their notional balances for calculating principal
allocations and credit event reductions, but only the notes are being offered and sold as part of
the STACR 2016-DNA1 transaction. Principal and interest distributions will only be made to
class M-1, M-2, M-3, and B notes.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
The offered notes have a 12.5-year legal final maturity and an early redemption option once the
aggregate unpaid principal balance of the reference pool becomes less than or equal to 10% of the
original balance or on or after January 2026.
Actual Principal Payments

Specified Credit Events

Class A-H
(Reference Tranche Only)
Reference Pool

Freddie Mac

Freddie Mac pays coupon on


Notes, which could be reduced
due to loan modifications, and its
obligation to repay principal on
the Notes is reduced for credit
events, and in certain instances
modifications on the Reference
Pool based on an actual loss
approach

Class M-1
(Note and Corresponding
Reference Tranche)

Class M-1H
(Reference Tranche
Only)

Class M-2
(Note and Corresponding
Reference Tranche)

Class M-2H
(Reference Tranche
Only)

Class M-3
(Note and Corresponding
Reference Tranche)

Class M-3H
(Reference Tranche
Only)

Class B
(Note and Corresponding
Reference Tranche)

Class B-H
(Reference Tranche
Only)

Principal and Interest


Freddie Mac will make monthly payments of accrued interest and periodic payments of principal to
M-1, M-2, M-3, and B notes. The actual cash flows from the reference obligations will not be paid to
holders of the notes. Rather, interest will be paid at the note rate and the amount of principal
payable each month will replicate scheduled and unscheduled principal received on the reference
obligations. This amount will also include calculated recovery principal on credit event loans, the
balance of loan removals due to rep and warranty repurchases by the underlying sellers and any
adjustments to loan balances arising from modifications.
Loans subject to a principal forgiveness modification will remain in the pool; however, the amount
forgiven will be treated as a principal curtailment and paid to the notes. If the borrower subsequently
defaults, the forgiven amount will be included in the realized loss amount and passed through to
noteholders. In this case, the noteholders will experience the same loss amount had the loan not
had a principal forgiveness modification. Scheduled and unscheduled principal reductions and
distributions are more fully described under the Financial Structure, Credit Enhancement, and Cash
Flow Analysis section.
Generally, scheduled principal will be allocated pro rata between the senior A-H tranche and the
subordinated classes (class M-1H, M-2H, M-3H, and B-H reference tranches and class M-1, M-2,
M-3, and B notes). As long as a minimum CE of 5.50% for the senior A-H tranche has been
maintained and the cumulative net loss test and delinquency test are satisfied, unscheduled
principal will also be allocated to the subordinate classes.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
Among the subordinated classes, principal will be allocated sequentially: first, pro rata, to the
class M-1H reference tranche and the M-1 notes until reduced to zero; second, to the M-2H
reference tranche and M-2 notes, pro rata, until reduced to zero; third, to the M-3H reference
tranche and M-3 notes, pro rata, until reduced to zero; and, fourth, to the B-H reference tranche
and B notes, pro rata. Principal will be allocated to the M-1H reference tranche and M-1 notes,
pro rata; the M-2H reference tranche and M-2 notes, pro rata; the M-3H reference tranche and
M-3 notes, pro rata; and the B-H reference tranche and B notes, pro rata, but will be distributed
only to class M-1, M-2, M-3, and B notes.

Credit Events
The reference tranches and class M-1, M-2, M-3, and B note balances will also be reduced by
actual LS percentages for reference obligations that experience a credit event. However,
current-month credit events will be reduced by reversals of prior months credit events and any
application of rep and warranty settlement amounts at the loan level. As a result, the LS
calculations will be applied to net credit event amounts each month.
Credit events experienced by the reference obligations include the following:
A short sale is settled.
A seriously delinquent mortgage note is sold prior to foreclosure.
The mortgaged property that secured the related mortgage note is sold to a third party
at a foreclosure sale.
A real estate-owned (REO) disposition occurs.
The related mortgage note is charged-off.
Reversals of prior months credit events will be applied if the reference obligations are found
in the related reporting period through Freddie Macs QC process to have an underwriting
defect, a major servicing defect or a data correction invalidating the credit event. Underwriting
defects include the following:

The reference obligation is repurchased by the related seller or servicer.

In lieu of a repurchase, an alternative remedy (such as indemnification) is mutually agreed


upon by Freddie Mac and the seller or servicer.

Freddie Mac, in its sole discretion, elects to waive the enforcement of a remedy against the
seller or servicer with respect to an unconfirmed underwriting defect (as more fully described
later in this report).

The party responsible for the reps and warranties and/or servicing obligations or liabilities
with respect to the reference obligation becomes subject to a bankruptcy or insolvency
proceeding or is put into receivership.

Loss Severity Percentages and Tranche Writedowns/Write-Ups


B-H, M-3H, M-2H, M-1H and A-H reference tranches and M-1, M-2, M-3, and B notes will be
subject to tranche writedowns equal to the net credit event amount each month at the actual LS
percentage experienced.
The subordinate reference tranches and
M-1, M-2, M-3, and B notes will be subject to
tranche writedowns equal to the net credit event
amount times the LS percentage.

If credit event reversals exceed the current months credit events, the reference tranches and
notes previously subject to tranche writedowns will be written back up. The tranche write-up
amount will equal the excess of reversals over credit events times the actual LS percentage for
the current payment date.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
Credit Enhancement
The B-H reference tranche and B notes are subordinated to the class M-3H reference tranche
and M-3 notes; class M-2H reference tranches and M-2 notes; and the class M-1H reference
tranche and class M-1 notes. All the class B and M reference tranches, as well as M-1, M-2,
M-3, and B notes, are subordinated to the senior A-H reference tranche.
Tranche writedowns will be first allocated to the class B-H reference tranche and B notes, pro rata,
until reduced to zero. Thereafter, the M-3H reference tranche and the M-3 note balance will be
written down, pro rata, until those balances are reduced to zero. Once the M-3H and M-3 tranches
are reduced to zero, the M-2H reference tranche, and the M-2 note balance will be written down, pro
rata, until those balances are reduced to zero. Next, tranche writedowns will be allocated to the
M-1H reference tranche and M-1 notes, pro rata. The A-H tranche will be written down once the
M-1H and M-1 classes are reduced to zero.
Tranches previously written down will be written back up (only up to amounts previously written
down) due to reversals of credit events and any rep and warranty settlement amounts that relate to
the specific loans that experienced a credit event or reversal of a credit event during the prior
payment period. Tranche write-ups will be applied to offset previously applied writedowns: first, to
the A-H senior reference tranche; second, to the M-1H reference tranche and M-1 notes, pro rata;
third, to the M-2H reference tranche and M-2 notes, pro rata; fourth, to the M-3H reference tranche
and M-3 notes, pro rata; and, fifth, to the B-H reference tranche and B notes, pro rata.
Loans are not added back to the reference pool when there are credit event reversals; rather, the
offset to any tranche write-up is made by applying a corresponding reduction to the senior class A-H
reference tranche through its senior reduction amount. This, in turn, reduces the senior reference
tranches percentage interest in principal reductions for future payment dates while increasing the
percentage interest in principal allocations and/or payments for those tranches written up.

Asset Analysis
The reference pool represents 144,144 mortgage loans acquired by Freddie Mac between
April 1, 2015 and June 30, 2015 that meet the eligibility criteria (defined in the table to the left)
out of an initial cohort population of 148,369 loans. To be eligible for inclusion in the reference
pool, loans must satisfy eligibility criteria. Discovery of certain violations of eligibility criteria will
result in reference pool removal.
Fitch believes the reference pool is diverse and composed of high quality prime collateral. The pool is
approximately six months seasoned, with clean payment histories. Overall, the reference pools
collateral characteristics are similar to recent STACR DN transactions.

Collateral Loss Assumptions


(%)
Rating

sMVD

Lifetime PD

Adjusted PD

LS

ELoss

AAsf

34.4

22.10

18.75

48.55

9.10

Asf

29.7

16.50

13.65

42.20

5.75

BBBsf

25.0

11.30

9.20

35.85

3.30

BBBsf

23.4

9.85

8.00

33.80

2.70

BBsf

20.3

6.95

5.55

29.70

1.65

Bsf

15.6

4.25

3.40

23.55

0.80

Notes: Adjusted PD reflects adjustment for a 12.5-year maturity and operational quality of Freddie Mac as an
aggregator. sMVD Sustainable market value decline. PD Probability of default. LS Loss severity. ELoss Expected
loss. Numbers rounded.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
Recently originated loans in both agency and non-agency are of high credit quality and expected to
experience lower lifetime defaults than loans originated in prior years. New agency pools will likely
experience modestly higher defaults than recently issued non-agency loans due to differences in
credit attributes. The main drivers behind the higher default expectations are higher CLTVs and
lower property values. Furthermore, non-agency borrowers tend to have substantial liquid reserves,
but, for agency borrowers, this information was not made available to Fitch. In addition, Fitch has
found the relationship of a loan's property value to the state-level median property value to be highly
predictive of borrower default. Agency mortgage pools have lower property value ratios than nonagency mortgage pools, which results in higher default expectations.
Fitch analyzed Freddie Macs loan-level actual loss dataset, which was released in November
2014 in anticipation of an actual loss credit offering. Freddie Macs loss data were compared
with the performance of PL non-agency loss data. Based on Fitchs analysis, differences in LS
are driven by attributes rather than differences in operational risk or procedures between
agency and non-agency loans. The chart below shows the LS and average attributes of a
sample of agency and non-agency loans controlled for a number of attributes. Fitchs analysis
is further described in Insights into Freddie Mac Loan Loss Data, dated February 2015.
Below is a comparison of the subject pools LS to the fixed LS schedule using Fitchs PD
assumptions. The table below illustrates that actual LS is greater than if using a fixed LS
schedule at the higher investment-grade rating categories, while the opposite is true at the
lower rating categories.

Reference Pool Eligibility Criteria


a) Fully amortizing, fixed-rate, one- to four-unit, first lien
original term of 30 years.
b) Originated on or after Jan. 1, 2015.
c) Securitized into a mortgage participation certificate
(PC) by Oct. 31, 2015 and remained in such PC as of
Dec 2, 2015.
d) Not repurchased by the applicable seller or servicer
as of Dec. 2, 2015.
e) Originated with streamlined accept or standard
documentation.
f) Not covered by pool insurance.
g) Original LTV > 60% and <= 80%.
h) Not subject to recourse or other CE.
i) Not originated under Freddie Macs Relief Refinance
program, including Home Affordable Refinance
Program (HARP).
j) Not originated under Home Possible or
other affordable mortgage programs of Freddie Mac.
k) Not associated with a mortgage revenue bond
purchased by Freddie Mac.

Collateral LS Comparison
(%)
Rating Stress

Fitch PD Assumption

Fitch Actual LS Assumption

STACR DN Fixed Severity Schedule

AAsf

18.75

48.55

37.85

Asf

13.65

42.20

37.05

BBBsf

9.20

35.85

35.60

BBBsf

8.00

33.80

34.95

BBsf

5.55

29.70

32.70

Bsf

3.40

23.55

27.85

l) Had an original principal balance $5,000.


m) Not originated under a government program (e.g.
FHA, VA or Guaranteed Rural Housing loans).
n) As of Oct. 31, 2015, has never been reported to
be 30 days or more delinquent since purchase by
Freddie Mac.
o) Servicer has not reported the borrower filed for
bankruptcy as of Dec. 2, 2015.
p) Not been prepaid in full as of Dec. 2, 2015.
q) No unconfirmed underwriting defects found in the
independent pre-offering due diligence review process.
r) No underwriting defects, major or minor servicing
defects or unconfirmed underwriting or servicing defects
found in Freddie Macs internal quality control process
as of Dec 2, 2015.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance

Transaction Comparison
Transaction Name
Current Pool Balance ($)

STACR 2016-DNA1
(Freddie Mac)
35,724,056,399

STACR 2015-DNA3
(Freddie Mac)
34,706,261,919

CAS 2015-C04 (G1)


(Fannie Mae)
26,875,730,155

Private-Label RMBS
a
Deal Average (20132014)
13,431,066,258

Average Loan Balance ($)

247,836

246,870

221,203

775,690

Number of Loans

144,144

140,585

121,498

17,315

Wells Fargo (12),


US Bank (6),
Bank of America (4)

Wells Fargo (9),


US Bank (7),
Bank of America (4)

Wells Fargo (12),


JP Morgan Chase (5),
Quicken Loans (5)

N.A.

Top Three Originators (%)

10

28

WA LTV (%)

75.1

75.1

76.0

66.1

WA CLTV (%)

76.1

76.0

77.0

67.4

WA sLTV (%)

80.6

79.9

79.0

62.4

WA FICO

754

754

746

770

WA DTI (%)

34.5

34.7

34.6

30.2

FRMs/ARMs (%)

Seasoning (Months)

100/0

100/0

100/0

93.0/7.0

IO (%)

0.0

0.0

0.0

5.1

Full Documentation (%)

100

100

100

86

WA Original Term

360

360

360

344

Piggy Back Seconds (%)

8.8

7.9

8.5

9.8

Primary Residence (%)

87.2

87.3

84.0

93.4

Purchase (%)

43.8

41.8

59.4

39.7

Retail (%)

53.6

50.8

55.7

72.7

2+ Borrower (%)

55.2

54.9

52.8

N.A.

Dirty Current (%)

0.0

0.0

1.6

0.0

88.2

88.4

85.5

90.5

Property Type (%)


Single-Family/PUD
Geographic Concentration (%)
(CA) 27.4

(CA) 28.6

(CA) 25.0

(CA) 46.1

Second Largest State

(TX) 5.6

(TX) 5.3

(TX) 8.1

(MA) 7.0

Third Largest State

(FL) 5.0

(FL) 4.8

(FL) 5.4

(TX) 6.2

Top Three States

38.0

38.7

38.5

59.4

Top Five States

46.0

46.3

47.0

68.9

Largest State

Subordination at Closing (%)b


Asf

5.75

5.70

6.40

3.35

BBBsf

3.30

3.25

3.70

2.00

BBBsf

2.70

2.65

3.05

1.70

BBsf

1.65

1.60

1.90

1.15

Bsf

0.80

0.75

0.95

N.A.

Average for Fitch-reviewed/analyzed transactions 20132014. bSubordination for STACR 2016-DNA1 is based on information provided by the issuer as of Jan. 5, 2016 and is
the expected subordination level.
N.A. Not applicable.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
Collateral Attribute Comparison
Vintage
1999

Sum ($000)
137,909,518

Average
Loan ($)
125,941

WAC (%)
7.3

LTV (%)
77.5

CLTV (%)
77.6

DTI (%)
33.2

Credit
Score
712

Purchase
(%)
58

Owner
Occupied (%)
94

CA (%)
17

2000

103,662,770

131,819

8.1

78.2

78.8

35.2

714

76

92

12

2001

259,616,751

147,797

7.0

75.5

76.2

33.7

717

39

94

17

2002

261,966,524

155,513

6.5

73.8

74.9

33.9

720

36

94

18

2003

311,446,862

161,429

5.7

72.2

73.5

32.8

725

29

94

16

2004

188,449,273

166,657

5.8

73.6

75.4

35.6

718

46

92

14

2005

239,850,767

181,201

5.8

72.2

74.1

36.9

724

44

93

13

2006

202,446,473

186,962

6.4

72.9

75.7

38.0

723

50

91

10

2007

202,135,111

189,025

6.4

74.3

77.2

38.2

724

47

90

11

2008

209,683,453

212,810

6.0

72.0

73.8

37.8

741

42

89

16

2009

344,439,645

227,701

5.0

67.1

68.9

32.8

763

24

93

18

2010

176,599,235

224,150

4.8

69.9

71.3

33.3

762

37

90

21

2011

130,966,531

235,910

4.6

71.1

72.4

33.4

763

43

90

25

STACR 2013-DN2
STACR 2014-DNa
STACR 2015-DNA1

35,327,317
63,633,923

242,636
232,757

3.6
4.3

74.3
75.6

75.3
76.6

32.2
34.1

764
757

27
58

89
87

25
22

31,875,735

234,736

3.7

74.5

75.5

32.1

766

31

89

25

STACR 2015-DNA3

34,706,262

246,870

4.1

75.1

76.0

34.7

754

42

87

29

STACR 2016-DNA1

35,724,056

247,836

4.0

75.1

76.1

34.5

754

44

87

27

The weighted average of STACR 2014-DN2, 2014-DN3 and 2014-DN4. WAC Weighted average coupon. DTI Debt-to-income ratio. CLTV Combined
loan-to-value ratio. CA California.
a

Key Probability of Default Drivers


Fitchs default projections were determined with a loan-by-loan analysis of the mortgages,
establishing a projected default for the aggregate pool. The agencys PD analysis focused on
both the borrowers willingness and ability to pay his/her mortgage debt. The pools key PD
drivers, as determined by Fitch, are described in the following sections.

Collateral Attribute Distribution


OCLTV Range
(%)
60.0165.00
65.0170.00
70.0175.00
75.0180.00
80.0190.00
90.01100.00

% Pool
8
13
22
50
6
1

Credit Score
Range % Pool
< 680
5
680719
17
720739
11
740759
14
760779
18
> 780
34

DTI Range (%)a


025
25.0130
30.0140
40.0145
45.0150
> 50.01

% Pool
19
14
36
22
9
0

UPB Range
($000)
< 100
100.01200
200.01300
300.01400
400.01500
> 500.0

% Pool
3
20
26
25
16
10

OCLTV Original combined loan-to-value ratio. DTI Debt-to-income ratio. UPB Unpaid principal balance.
b
The DTI for 89 loans was unavailable.

Low CLTV and sLTV Positive


The WA original LTV (OLTV) of 75.1% and WA combined LTV (CLTV) of 76.1% represent
adequate equity in the property and reduced default probability. While 8.8% of the loans have
second liens, the WA mark-to-market (MtM) CLTV is 75.3%, based on the first-quarter 2015 CaseShiller home price index. All mortgages in this pool are in the first lien position. After taking into
account Fitchs MVD estimates, the base case WA sLTV on the pool is 80.6%. The sLTV is an
indication that the borrowers will still have enough equity to absorb an sMVD of 6.2% estimated by
Fitchs model.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Structured Finance
Reference Pool Sellers
Reference Pool Loan Sellers
Wells Fargo Bank, N.A.

Original CLTV Ratios

%
12

U.S. Bank N.A.

Bank of America, N.A.

Quicken Loan Inc.

Loan Depot LLC

Number of
Mortgage Loans
11,010

Original CLTV (%)


60.0165.00

WA Original
FICO
756

WA Original
CLTV (%)
63.3

% of
Mortgage Pool
7.7

65.0170.00

18,654

752

68.4

70.0175.00

31,194

756

73.8

13.4
22.0

75.0180.00

76,360

754

79.5

50.2

Caliber Home Loans, Inc.

Branch Banking & Trust

80.0185.00

1,459

752

83.7

1.4

Stearns Lending LLC

85.0190.00

4,353

755

89.4

4.4

Franklin American Mortgage

90.0195.00

1,114

750

94.1

0.8

Flagstar Bank

Total

144,144

754

76.1

100.0

Other

53

Top Five

31

Top 10

47

CLTV Combined loan-to-value ratio. WA Weighted average.

The sLTV is calculated based on the lower of the appraisal value and the value determined by
Fitchs SHP model. The SHP model calculates the declines necessary to return to sustainable
home prices at the state or MSA level. The sMVD used to calculate SHP is based on regional
economic conditions and analysis of fundamental price drivers. The sLTV reflects equity in the
property after adjusting for changes in market value needed to achieve price sustainability.
Further detail on Fitchs SHP model can be found in U.S. RMBS Loan Loss Model Criteria,
dated August 2015, available on its website at www.fitchratings.com.

High Original Credit Score Positive


The collateral pool consists of borrowers with strong credit profiles, as demonstrated by the
high original WA FICO score of 754. Approximately 34.4% of the borrowers have credit scores
of 780 or above. Borrowers with high credit scores generally experience a lower probability of
defaulting on their debt. Approximately 11.9% of borrowers have a credit score below 700.
However, the WA CLTV of 75.3%, as well as the maximum OLTV of 80% for those loans with
FICO scores of 700 and below, indicates limited risk layering among weaker-credit borrowers.

Original Credit Score


600-619

Number of
Mortgage Loans
59

WA Original
Credit Score
612

WA Original
CLTV (%)
75.2

% of
Mortgage Pool
0.0

620639

1,116

630

74.9

0.7

640659

2,491

650

75.1

1.5

660679

4,439

670

74.4

2.8

680699

10,553

690

75.7

7.0

700719

14,438

710

76.5

9.9

720739

16,153

729

76.7

11.5

740759

19,866

750

76.7

14.2

760779

24,777

770

76.4

18.0

780799

30,632

790

76.0

21.8

800900

19,617

807

75.3

12.6

Total

144,144

754

76.1

100.0

Original FICO

FICO Fair Isaac Corp. score. WA Weighted average. CLTV Combined loan-to-value ratio. The original credit
score for 3 loans was unavailable.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

10

Structured Finance
Full Documentation Positive/Neutral
All loans in the reference pool were underwritten to Freddie Macs full documentation guidelines and
support the borrowers ability to repay. Freddie Macs employment and income policies focus on the
borrowers ability to repay the mortgage debt and consider the stability, adequacy and likelihood of
continued receipt of income. For income to be used for qualifying purposes, the lender must be able
to substantiate the income by documenting its source, amount and, for certain types of income, the
history of receipt and likelihood of continued receipt.
Freddie Mac has two levels of documentation streamlined and standard. Under the streamlined
requirement where lenders use Loan Prospector (LP) and LP provides a streamlined designation,
the rule of 1 applies under which, for a salaried borrower, a verification of employment, a year-todate pay stub or 30 days of consistent income and a W-2 form for the most recent year are required.
Asset verification consists of a bank statement for one month. This is consistent with Fitchs
definition of a full documentation program.
The standard documentation is used for manually underwritten loans and loans evaluated by LP but
where LP assigns the standard document designation. Under the standard documentation program,
a salaried borrower would be required to show a verification of employment, a year-to-date pay stub
or 30 days of consistent income and a W-2 form for the most recent two years. Asset verification is a
bank statement for two months.

Number of Borrowers Neutral


Fitch has identified a strong relationship between the number of borrowers on a loan and
default behavior. Mortgage loans made to two borrowers outperform those made to a single
borrower. To account for this performance difference, Fitch assigns a lower default probability
to two-borrower loans than to those made to single borrowers.
Approximately 45% of loans in the reference pool were made to one borrower, and the
remaining 55% of the loans were made to two or more borrowers. The reference pools
borrower count composition is consistent with the historical dataset used in the development of
Fitchs mortgage loan loss model.

Key Loss Severity Drivers


Fitchs LS analysis incorporates projections of regional MVDs, foreclosure and liquidation
timelines, estimated carrying costs, and liquidation expenses. Regional market value declines
are projected at the MSA and state level, while the other variables are projected only at the
state level. The recovery value is determined by applying a quick-sale adjustment to the market
value of the property.
Realized losses will include accrued interest from the borrowers last payment to liquidation,
while Freddie Mac will pay interest on the bonds through liquidation.

Low WA Mortgage Interest Rate Positive


The collateral has a relatively low WA mortgage interest rate of 3.98%, ranging from
2.875%5.625%. The interest carrying costs of the loan during delinquency through liquidation
can be significant and drive up a loans LS percentage. However, the low mortgage rates on
the loans in this pool mitigate this risk.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

11

Structured Finance
Other Considerations
While the loan loss model is a key component in the rating process, Fitch factored in other
important considerations when assigning ratings to this transaction, as described below.

Solid Lender Review and Acquisition Process Positive


Based on its review, Fitch considers Freddie Mac to be an above-average aggregator for 2013
and later acquisitions. Fitchs assessment is based on Freddie Macs robust lender-approval
and monitoring processes; strong underwriting and loan acquisition process; improved creditrisk management structure; and expanded/robust lender quality and loan QC platform. To
determine the adequacy of its sellers QC processes, Freddie Macs counterparty operational
risk evaluation (CORE) unit conducts annual onsite reviews for its top lenders by volume, with
others targeted based on certain flagged activity. In these reviews, approved lenders QC
processes and operational controls are analyzed and assessed. Any deficiencies are brought
to their attention, and recommendations are made to correct the deficiencies. Based on its
findings (critical, major, other or observation), Freddie Mac provides an assessment to the
counterparty to assist in prioritizing remediation efforts.

Risk Retention Positive


Freddie Mac will retain the risk of losses on reference obligations in the reference pool that are
allocable to the class A-H, M-1H, M-2H, M-3H, and B-H reference tranches.
Freddie Mac does not intend, through this transaction or any subsequent transactions, to enter
into agreements that transfer or hedge more than a 95% pro rata share of the credit risk on the
(i) class A-H reference tranche; (ii) M-1 and M-1H reference tranches (in aggregate); (iii) class
M-2 and M-2H reference tranches (in aggregate); or (iv) class M-3 and M-3H reference
tranches (in aggregate). Freddie Mac will retain a minimum of 50% of the B and B-H reference
tranches (in aggregate).
While Fitch believes that the risk of loan quality defects is low due to Freddie Macs lender review
process and risk management controls, the strong alignment of interests provides a greater
incentive for Freddie Mac to manage lender oversight quality and enforce loan repurchases for
defective loans that could otherwise increase credit events with respect to the reference pool.

12.5-Year Deal Maturity Positive


Fitch reduced its default expectations due to the
12.5-year maturity date.

The notes mature on the payment date in July 2028. Freddie Mac will be obligated to retire
M-1, M-2, M-3, and B notes by paying the full amount of the remaining principal balance
outstanding and accrued and unpaid interest.
Unlike PL RMBS, where the stated maturity is linked to the last maturing loan, tail risk and
adverse selection can strongly influence the pool. Since ratings performance is driven primarily
by small loan count later in the life of the deal, the hard maturity for STACR 2016-DNA1
virtually eliminates this risk. The 12.5-year maturity effectively caps the notes exposure to
credit losses to a 12.5-year window.
Given the reduced default exposure, an adjustment to Fitchs lifetime default expectations was
applied. Fitch analyzed default timing distribution by vintage to determine the adjustment for
each rating stress. Higher rating categories reflect a harsher economic stressed environment in
which defaults occur sooner in a deals life. As a result, fewer defaults would occur after a
given period, compared with lower rating categories, which reflect a less stressful economic
environment. Based on this analysis, Fitch applied an 8%, a 10% and a 14% reduction to

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

12

Structured Finance
the models Asf, BBBsf, and Bsf lifetime PD assumption, respectively, to account for the
12.5-year legal maturity.

Limited Scope of Compliance Due Diligence Concern


The third-party due diligence scope for compliance review was limited to Freddie Macs AntiPredatory Lending Compliance Review and Loan Document Inventory guidelines. Freddie
Macs compliance document delivery guidelines require only those documents needed to
determine compliance with laws that may result in assignee liability and restrict points and fees.
Therefore, Freddie Mac does not examine all the documents necessary to ensure that a
mortgage loan complies with all applicable federal, state and local laws and regulations.
Instead, Freddie Mac strongly relies on its lenders/sellers QC processes for ensuring that loans
are in compliance with applicable laws. Freddie Mac also relies on the lenders/sellers reps and
warranties that the loans fully comply with federal, state and local laws and will demand a
repurchase if the loan is not in compliance.

Third-Party Due Diligence Review


Per Fitchs criteria, third-party loan-level results were reviewed by the agency for this
transaction. The due diligence company, Opus Capital Markets Consultants LLC (Opus),
examined selected loan files with respect to the presence or absence of relevant documents.
Fitch received certifications indicating that the loan-level due diligence was conducted in
accordance with Fitchs published standards. The certifications also stated that the company
performed its work in accordance with the independence standards, per Fitchs criteria, and
that the due diligence analysts performing the review met Fitchs criteria of minimum years of
experience.
The due diligence sample consisted of 850 loans randomly chosen by Opus out of
approximately 5,064 eligible loans acquired between April 1, 2015 and June 30, 2015 for which
Freddie Mac had completed post-purchase QC reviews. The scope of the due diligence
engagement covered:
Credit and compliance reviews.
Fitch Grade Summary
Property valuation reviews.
Data integrity.
Final Overall Grade
Total Loan Count
A

846

Opus compliance review was based on B


0
Freddie Macs Anti-Predatory Lending C
2
Compliance Review and Loan Document D
2
Total
850
Inventory guidelines. Freddie Mac relies on
the seller reps and warranties to ensure
compliance with all laws, including
consumer protection laws, and only validates the absence of any anti-predatory lending issues
that could lead to assignee liability. Of the loans sampled, the table above reflects Opus final
overall grades (using Fitchs event grades) and loan counts. For a further discussion on the
due diligence review results, refer to Appendix D.

Aggregator Review Analysis


Fitch assessed Freddie Mac as an aggregator of mortgage loans, in accordance with its criteria
report, U.S. RMBS Master Rating Criteria, dated October 2015. Based on its operational review
and the information provided to Fitch by Freddie Mac, Fitch considers Freddie Mac to be an above-

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

13

Structured Finance
average aggregator for its 2013 and later acquisitions. See Appendix A for a full description of
Fitchs review and findings of Freddie Mac as an aggregator.
To maintain strong risk management results while acquiring a high volume of loans from a large
number of sellers, Freddie Mac emphasized the processes and tools developed to test and monitor
the individual loans, as well as its sellers compliance with guidelines.
Freddie Macs risk management efforts begin with its mortgage credit-risk management group,
which establishes, develops and implements credit policies and sets risk limits for the approved
sellers and the quality loans the agency acquires. This group is also responsible for setting the
corporate credit policy and policy exceptions, as well as maintaining and updating Freddie Macs
seller/servicer guide.
To manage its counterparty risk, the GSE has a stringent approval process, credit analysis limits
and exposure caps, as well as continual monitoring and surveillance of its sellers. This process is
managed by Freddie Macs counterparty credit-risk management unit, which enforces the eligibility
requirements for sellers to Freddie Mac, including a review for financial capacity, operational
capabilities and reputational considerations.
The CORE teams perform regular reviews of the sellers operations, as well as reviews as part of
the initial approval process, to ensure the sellers are operating to Freddie Macs standards. Through
onsite reviews and monitoring and remediation of any identified issues, this group provides Freddie
Mac with necessary information about the single-family counterparties effectiveness of controls over
the sellers mortgage operations and compliance with Freddie Mac requirements.
Freddie Macs QC process tests the accuracy of the delivered data on purchases to validate the
loans and assess compliance with requirements. Results are used to determine ineligible defect
rates of lenders and to assess fees and/or implement action plans. Loans are sampled, both in a
targeted and random selection, to mitigate losses, resolve repurchases, provide feedback to policy
management, ensure sellers have strong underwriting processes and validate data quality. A
significant enhancement to the QC process has been the accelerated review for performing loans to
allow for near real-time results to sellers.
The key to the enhanced targeted or discretionary selection of loans for QC has been the availability
of data on the loans provided through the continuing development of the Uniform Mortgage Data
Program (UMDP) initiatives, including the Uniform Loan Delivery Dataset (ULDD) and Uniform
Collateral Data Portal (UCDP). The extensive data provided by these systems allow Freddie Mac to
target loans that appear to have defects, both in
credit profile and property valuations, so that the
agency can QC these files shortly after delivery Servicers
UPB (%)
and initiate repurchase actions, if necessary, Reference Pool Servicers
Wells
Fargo
Bank,
N.A.
12
before the seller reps and warranties expire.

Servicers and Master Servicer


Freddie Mac has robust servicer-approval
and servicing oversight processes.

The servicing of Freddie Mac-purchased


loans will generally be retained by each
individual originator/seller if the entity is also
an approved servicer. Freddie Mac will act as
master servicer. In this role, Freddie Mac will
set servicing standards and requirements,
monitor the direct servicers performance,
remove direct servicers with or without cause

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

U.S. Bank N.A.

Bank of America, N.A.

Quicken Loan Inc.

Caliber Home Loans, Inc.

Branch Banking & Trust

Suntrust Mortgage, Inc.


Pingora Loan Servicing

3
3

Franklin American Mortgage

3
2

Nationstar Mortgage
Other

54

Top Five

31

Top 10

46

UPB Unpaid principal balance.

14

Structured Finance
and approve (or deny) any transfer of servicing prior to transfer. Freddie Mac communicates
standard requirements for all servicers through its servicing guide and written announcements,
lender letters and servicer notices.
Fitch believes that Freddie Mac has robust servicer-approval and servicing oversight processes
and has implemented a number of changes in recent years to improve market practices and
performance. Such changes include the introduction of the servicing alignment initiative
designed to establish consistent policies and processes for the servicing of delinquent loans
owned or guaranteed by the GSEs. Objectives of the program are to improve service to the
borrower, increase efficiencies in loan modification processing and strengthen servicer
accountability.
In addition, Freddie Mac has made material enhancements to its servicing success program, which
outlines how it defines, measures and recognizes servicing excellence, including a servicer success
scorecard, file reviews and rewards and remedies.
Fitch views the primary servicer diversity (approximately 40% Fitch rated) and Freddie Macs
servicing oversight role as positives for the transaction. Servicing can influence whether or not
credit events occur and the actual loss is incurred. See Appendix B for a detailed description of
Freddie Macs servicer approval and oversight process.

Mortgage Loan Representations and Warranties


The substance of the reps is consistent with
what the agency views as a full framework
with the following minor variations.

The mortgage loans comprising the reference pool are not pledged to secure the notes, and
Freddie Mac is not making reps and warranties regarding the loans. However, because Freddie
Macs QC review of loan files is limited in scope where the focus of its review is to confirm
that the manufacturing of the loan is in compliance with its underwriting and eligibility guidelines
(or determining if compensating factors are present when outside those guidelines), rather than
assessing credit risk and future performance and does not include a review of loan files for
compliance with most local, state and federal laws, significant reliance is placed on the reps
and warranties made by the loan sellers to Freddie Mac.
While Fitch believes that Freddie Macs risk management platform and processes are robust,
the quality of the reps and warranties made by the lenders to Freddie Mac plays an essential
role in determining the overall risk profile of the reference pool. Fitch reviewed the reps and
warranties made by the lenders to Freddie Mac and compared those reps with those listed in
Fitch criteria and typically found in PL RMBS.
Reps and warranties are contained in the selling and servicing guides and the lender contracts.
Violation of any rep or warranty is a breach of the lender contract, including the warranty that
the loan complies with all applicable requirements, which provides Freddie Mac with certain
rights and remedies. Per Freddie Macs guide, the warranties and reps in the purchase
documents for any mortgage purchased by Freddie Mac survive payment of the purchase price
by Freddie Mac. The warranties and reps are not affected by any investigation made by, or on
behalf of, Freddie Mac, except when expressly waived in writing by Freddie Mac.
The reps and warranties made by the lenders to Freddie Mac do not replicate Fitchs criteria
verbatim. However, Fitch concluded that the substance of the reps is consistent with what the
agency views as a full framework with the following minor variations:

Data: Fitchs rep expects credit scores to be refreshed within six months of deal closing.
However, Freddie Macs rep requires that the credit score not be more than four months old at
the time the note is signed. An adjustment to the PDs was not made due to mitigating factors,
such as over 12 months of clean pay history.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

15

Structured Finance

No Bankruptcy/No Foreclosure: Fitch expects that no borrower was subject to any


bankruptcy proceedings in the four years prior to the origination of the mortgage loan. Fitch
also expects that no borrower previously owned a property that was subject to a foreclosure,
deed-in-lieu or short sale in the prior seven years from the origination of the mortgage. Freddie
Macs rep is significantly shorter, with a waiting period for bankruptcy of 24 months and
36 months for foreclosure. Because these guidelines are mandated by FHFA and borrowers
are subject to a full underwriting, Fitch did not make any adjustment to its default expectations.
Mortgage Loan Qualifies for REMIC: This rep is not applicable, as the transaction is a senior
unsecured debt of Freddie Mac and not a trust structure.

Enforcement Mechanisms
None of the reps and warranties made to Freddie Mac by the lenders/sellers will be passed through
to noteholders. Rather, rep and warranty breaches will be treated as removals from the reference
pool upon identification and final determination through Freddie Macs QC process of an
underwriting defect relating to a reference obligation (as listed on page 5) or the discovery of a
violation of the eligibility criteria (as listed on page 6).
Freddie Mac will conduct QC reviews on all loans that experience a credit event, irrespective of the
sellers insolvency, as long as the rep and warranty period has not sunset. Effective June 2, 2014,
all loans for which the rep and warranty is in effect will be subject to a review to determine whether
an underwriting defect has taken place. Fitch believes that this provision more closely aligns the
deals rep enforcement mechanism with what it considers a full framework.
Underwriting defects are reference obligations for which Freddie Mac has determined the existence
of an unconfirmed underwriting defect and a repurchase request has been made; indemnification
between Freddie Mac and the seller/lender is agreed upon; or Freddie Mac waived a remedy
enforcement or the seller becomes subject to a bankruptcy or insolvency proceeding or is put into
receivership after a repurchase request was made or indemnification agreement was entered into.
Unconfirmed underwriting defects are those loans for which Freddie Mac has determined and
notified the lender/seller that the reference obligation is in material violation of its guidelines or not
supported by the collateral or for which repayment in full cannot be expected. If the seller/lender
cannot cure the defect, a repurchase or indemnification is transacted, and the reference obligation is
then deemed an underwriting defect for purposes of loan removals or credit event reversals.
A loan will also be deemed as having an underwriting defect and, therefore, removed from the pool
or treated as a credit event reversal if it is designated as an unconfirmed underwriting defect and the
seller has become subject to bankruptcy or insolvency proceedings or was put into receivership.
A loan is treated as a reversed credit event if it was treated as a credit event that reduced available
CE but was later identified as having an underwriting defect or being in violation of eligibility criteria.
Reversed credit event obligations apply to a reference obligation that became a credit event in a
prior reporting period.
Reversed credit events are accounted for in the calculated tranche write-up amount. Tranche writeups may also be adjusted for any rep and warranty settlement amounts on a loan level. The loan
repurchase process can take up to 120 days or longer if Freddie Mac ultimately determines that a
noncurable breach has occurred.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

16

Structured Finance
Financial Structure, Credit Enhancement and Cash Flow Analysis
Classes A-H, M-1H, M-2H, M-3H, and B-H are reference tranches and have notional balances
solely for the purpose of calculating principal payments required to be paid by Freddie Mac to class
M-1, M-2, M-3, and B notes, as well as any reductions or increases of principal as a result of credit
events and reversed credit events experienced by the reference obligations. Only the classes M-1,
M-2, M-3, and B reference tranches, which also have notional balances, will have corresponding
classes of notes offered in conjunction with the issuance of the STACR 2016-DNA1 transaction.

Initial Expected Credit Enhancement


Notes and Reference Tranches

Tranche Size (%)

Initial Expected CE (%)

95.00

5.00

M-1 and M-1H

1.05

3.95

M-2 and M-2H

1.00

2.95

M-3 and M-3H

1.95

1.00

B and B-H

1.00

0.00

A-H

Financial Structure
Class M-1 notes will receive principal payments each month based on allocations applied to its
respective reference tranche. Class M-1 notes benefit from the pro-rata pay structure and
subordination of M-2, M-3, and B classes provided for in this transaction. Scheduled principal is
paid pro rata between the senior A-H reference tranche and the subordinated classes (M-1,
M-1H, M-2, M-2H, M-3, M-3H, B, and B-H). If the minimum CE test of 5.50% of the pool
balance is maintained and the cumulative net loss and delinquency tests are satisfied, the
subordinated classes will also share in unscheduled principal amounts.
All amounts allocable as principal payments to the subordinated classes are applied or paid
first to the M-1H reference tranche and M-1 notes, pro rata, before any payments are applied to
the M-2H, M-2, M-3H, M-3, B-H, and B classes. This has the effect of quickly paying down the
M-1 notes while increasing its protection through the full lockout of the M-2H, M-2, M-3H, M-3,
B-H, and B classes.
Payments of principal will simulate scheduled and unscheduled principal received on the reference
obligations and include the balance of loan removals. The notes will be subject to tranche
writedowns arising from credit events and write-ups from loan repurchases and rep and warranty
settlements. Scheduled principal includes all monthly payments due on the reference obligations
and collected by the servicer. Unscheduled principal includes the following:
All partial principal prepayments on the reference obligations in the reference pool collected
during the related reporting period, plus;
The aggregate unpaid principal balance of all reference pool removals (excluding credit event
reference obligations) for such payment date, plus;
Negative adjustments in the unpaid principal balance of all reference obligations as the result
of loan modification or data corrections, minus;
Positive adjustments in the unpaid principal balances of all reference obligations as the result
of loan modifications, reinstatements due to error or data corrections.
Reference obligations subject to modifications will remain in the pool, including those that require or
permit Freddie Mac to forgive principal. However, the portion of the loan balance that is forgiven will
be treated as unscheduled principal and allocated to the various reference tranches based on their

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

17

Structured Finance
share of unscheduled principal. Only the portion of the balance outstanding (unforgiven portion)
remains in the pool and has the LS percentage applied if it subsequently experiences a credit event.
If positive adjustments to the reference obligation loan balances from modifications or data
corrections exceed the total amount of principal collections or negative adjustments, the
difference will be added to the senior class A-H reference tranche. Reference pool removals
include:

The reference obligation becomes a credit event reference obligation.


Payment in full of the reference obligation.
The identification and final determination, through Freddie Macs QC process, of an underwriting
defect or a major servicing defect relating to that reference obligation.
The discovery of a violation of the eligibility criteria for such reference obligation.
The reference obligation is seized pursuant to any special eminent domain proceeding brought by
any federal, state or local government with the intent to provide relief to financially distressed
borrowers with negative equity in the underlying mortgage loan.

If the senior CE drops below 5.50% or the cumulative net loss test or delinquency test is not
satisfied, unscheduled principal otherwise allocable to the subordinate classes will be diverted
to the senior tranche until these tests are satisfied again.
The delinquency test will be satisfied if the
outstanding principal balance of distressed
mortgage loans averaged over the prior
six-month period is less than 50% of the
subordinate principal balance as of the
prior payment date net any principal loss
amount for the current payment date.
Distressed mortgage loans include loans
that are 60 days or more delinquent, in
foreclosure, bankruptcy, REO or modified
in the prior 12 months.

Credit Enhancement

Cumulative Net Loss Test


Payment Date Occurring in the Period

(%)

February 2016January 2017

0.10

February 2017January 2018

0.20

February 2018January 2019

0.30

February 2019January 2020

0.40

February 2020January 2021

0.50

February 2021January 2022

0.60

February 2022January 2023

0.70

February 2023January 2024

0.80

February 2024January 2025

0.90

February 2025January 2026

1.00

February 2026January 2027

1.10

1.20
Together, the M-1, M-1H, M-2, M-2H, M-3, MFebruary 2028 and Thereafter
1.30
3H, B and B-H reference tranches provide
CE for the senior A-H reference tranche.
Class M-1 notes, which Fitch expects to rate BBBsf, have 3.95% in credit support; class M-2 notes,
which Fitch expects to rate BBBsf, have 2.95% in credit support; and class M-3 notes, which Fitch
expects to rate Bsf, have 1.00% in credit support. Credit events are netted against credit event
reversals (both as described on page 5) and applied the loans actual LS. The loss amount derived
will result in a writedown to the most subordinated B notes and B-H reference tranches, pro rata,
first, and then to M-3 notes and M-3H reference tranches, pro rata, and so forth.
February 2027January 2028

Tranche write-ups will be applied to those classes previously written down if the reversals exceed
the current months credit events. The most senior tranche to have been written down is first in the
priority to be written up, beginning with the senior class A-H; second, to M-1 and M-1H, pro rata; and
so forth. Tranche write-ups may also be adjusted for any rep and warranty settlement amounts on a
loan level.
Net credit event reversals do not result in additions to the reference pool. To offset the increase in
tranches that are written up from a reversal of a credit event or a post-credit event rep and warranty
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
January 7, 2016

18

Structured Finance
settlement, a concurrent reduction to the class A-H reference tranche is made. This has the effect of
reducing the senior percentage interest in future principal allocations while increasing the
subordinated classes percentage interest, which ultimately is distributed first to M-1 notes.

Cash Flow Analysis


The cash flow analysis described in Fitchs U.S. RMBS Cash Flow Analysis Criteria was not
applied to this transaction. Fitch did not deem the cash flow analysis as necessary, given that
the bond principal and interest payments are general unsecured debt obligations of Freddie
Mac and principal payments to the rated bonds are made in a sequential priority for the life of
the transaction.
For this deal and other similar credit-risk transactions issued by the GSEs, minimum CE is not
negatively affected by interest rates or the timing of prepayments and defaults. Therefore, a
cash flow analysis was not performed for this transaction, as Fitch did not deem it necessary to
assess the impact of prepayment, default, and interest rate stress scenarios on CE.

Counterparty Risk
The notes are senior unsecured obligations of Freddie Mac, which has been under conservatorship
since 2008, with FHFA acting as conservator. Freddie Mac has a long-term IDR of AAA with a
Stable Rating Outlook. The IDR and Rating Outlook are directly linked to the U.S. sovereign rating
based on Fitchs view of the U.S. governments direct financial support of Freddie Mac. If, at some
point in the future, Fitch views the strength of support as being reduced, the ratings and/or Rating
Outlook may be de-linked from the sovereigns and downgraded.
In the event of a downgrade of Freddie Macs IDR, the M-1, M-2, and M-3 notes, along with their
corresponding MAC notes, could be subject to downgrade based on the lower of Fitchs analysis of
the quality of the mortgage loan reference pool and CE available through subordination and Freddie
Macs IDR.

Transaction and Legal Structure


The issuer for this transaction is Freddie Mac. The notes will be general unsecured obligations of
Freddie Mac and have the same priority as all the GSEs other general unsecured and
unsubordinated debt ($412.0 billion outstanding as of Sept. 30, 2015).
Proceeds from the issuance will be used for general corporate purposes. The repayment of the
principal portion of the debt obligations for this transaction will be subject to the performance of the
reference mortgage obligations. The actual cash flows from the reference obligations will not be paid
to holders of the notes; however, Freddie Mac will make monthly payments of accrued interest and
periodic payments of principal to noteholders. The notes will have a 12.5-year legal final maturity, at
which point, the issuer will be obligated to retire the notes by paying an amount equal to their full
remaining principal balance plus any accrued and unpaid interest.

Disclaimer
For the avoidance of doubt, Fitch relies, in its credit analysis, on legal and/or tax opinions
provided by transaction counsel. As Fitch has always made clear, Fitch does not provide legal
and/or tax advice or confirm that the legal and/or tax opinions or any other transaction
documents or any transaction structures are sufficient for any purpose. The disclaimer at the
foot of this report makes it clear that this report does not constitute legal, tax and/or structuring
advice from Fitch and should not be used or interpreted as legal, tax and/or structuring advice
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
January 7, 2016

19

Structured Finance
from Fitch. Should readers of this report need legal, tax and/or structuring advice, they are
urged to contact relevant advisers in the relevant jurisdictions.

Model, Criteria Application and Data Adequacy


Modeling
Fitch analyzed the credit characteristics of the underlying collateral to determine base case and
rating stress loss expectations, using its residential mortgage loss model, which is fully
described in its August 2015 criteria report, U.S. RMBS Loan Loss Model Criteria. All reports
are available on Fitchs website at www.fitchratings.com.

Criteria Application
Fitch analyzed the transaction in accordance with its RMBS rating criteria, as described in its
October 2015 report, U.S. RMBS Master Rating Criteria.
An assessment of the transactions reps and warranties provided by the originator was also
completed and found to be consistent with the ratings assigned to the certificates. Fitch
assessed the reps and warranties using its criteria described in the October 2015 criteria report,
U.S. RMBS Master Rating Criteria.

Data Adequacy
Fitch relied on an independent third-party due diligence review performed on a sample of 850 loans,
which were randomly chosen by Opus out of approximately 5,064 eligible loans acquired between
April 1, 2015 and June 30, 2015 for which Freddie Mac had completed post-purchase QC reviews.
The agency assessed the due diligence results using its criteria described in the October 2015 criteria
report, U.S. RMBS Master Rating Criteria, available on Fitchs website at www.fitchratings.com.
The scope of the due diligence engagement covered: credit and compliance reviews; property
valuation reviews; and a data integrity review.
A final exception and waiver report was provided to Fitch, indicating that the pool of reviewed loans
had minimal exceptions and waivers. No adjustments were needed to compensate for these
occurrences. For a more detailed discussion on the review results and findings, refer to Appendix D.
Fitch also utilized data files made available by the issuer on its SEC Rule 17g-5 designated website.
Fitch received loan-level information; however, it was not provided based on the American
Securitization Forums (ASF) data layout format. Although not provided in the ASF data layout, Fitch
considered the data to be comprehensive. The ASF data tape layout was established with input
from various industry participants, including rating agencies, issuers, originators, investors and
others, to produce an industry standard for the pool-level data in support of the U.S. RMBS
securitization market. The data contained in Freddie Macs layout data tape were reviewed by the
due diligence company, and no material discrepancies were noted.

Performance Analytics
The transaction will be analyzed and reviewed by a full committee process involving senior
members of the RMBS group at least once every 12 months but more frequently, if warranted,
due to unexpected changes in performance. Additional detail on Fitchs surveillance process
can be found in U.S. RMBS Surveillance and Re-REMIC Criteria, dated June 2015, available
on its website.
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
January 7, 2016

20

Structured Finance
Appendix A: Aggregator
Fitch attended a rating agency presentation held by Freddie Mac on its risk management and loan acquisition process at the GSEs
McLean, VA office on November 5, 2015 as part of the GSE risk transfer initiative. The presentation was an update to one held by
Freddie Mac in November 2014. The day-long presentation included areas typically reviewed by Fitch for private-label (PL)
aggregators and securitizers of residential mortgage collateral.
The rating agency presentation included Freddie Macs approach to seller approval and counterparty monitoring, counterparty
operational risk evaluation, single family credit policy and credit management, and underwriting, quality control and credit analytics.
These topics are discussed below. Additionally, Freddie Mac provided a presentation on single family servicing and an overview of
its HomeSteps REO management program; these aspects are covered in Appendix B of this report.
The presentation, associated discussion, and Fitchs experience with Freddie Mac were evaluated in accordance with Fitchs criteria
as detailed in its U.S. RMBS Master Rating Criteria, dated October 2015. Based on this review, Fitch maintains its view of the
Agency as an above-average aggregator of mortgage loan collateral.

Overview
During the nine months ending Sept. 30, 2015, Freddie Mac had approximately 1,600 approved, but only approximately 1,100 active,
sellers and purchased more than 1.2 million loans with an approximate unpaid balance of $274.9 billion. Freddie Macs single-family
credit guarantee portfolio as of Sept. 30, 2015 totaled approximately $1.693 trillion.
Freddie Macs top 10 mortgage loan sellers provided approximately 51% of its single-family purchase volume during the nine
months ending Sept. 30, 2015. Bank of America, N.A. and Wells Fargo Bank, N.A. each accounted for 12% of the single-family
mortgage purchase volume and were the only single-family sellers that comprised 10% or more of the purchase volume during this
time frame.
Requirements for approval have been developed by Freddie Mac to ensure that sellers are reasonably expected to meet all
requirements for participation in the Agencys programs. Several quality initiatives have recently been instituted by Freddie Mac,
including added clarity to roles and responsibilities within risk management, including the adoption of a three-lines-of-defense
framework. The transition to this enhanced framework has resulted in realignment of roles and responsibilities within the single
family credit risk function; most credit functions have moved to the single family business line. Also, during the broad post-crisis time
period, Freddie Mac has made a number of changes to its loan acquisition platform and risk management infrastructure. These
changes include:

Improved policy frameworks.

Strengthened governance and controls.

Enhanced information, technology, and reporting.

Increased emphasis on the monitoring of seller financial condition.

More stringent seller approval process.

Loan Prospector
Freddie Mac uses a delegated underwriting process through its proprietary automated underwriting system (AUS), Desktop
Underwriter (DU), for the mortgage loans that it acquires. LP is focused on eligibility encompassing credit, capacity and collateral. It
is meant to be used early in the lenders process and provides both a view of Freddie Macs assessment of the risk of the loan, as
well as guidance on how to underwrite and document the loan to meet Freddie Macs eligibility requirements. LPs key features
include:

Feedback certificates that validate accuracy of the data entered and determine the risk class, documentation level and purchase
eligibility. The system provides feedback messages with specific underwriting guidelines based on the loan data provided.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

21

Structured Finance

Credit report options allow the ordering or reassessing of credit reports provided by credit reporting companies. The system also
contains a re-order credit feature that allows the request of fresh credit in files or merged credit on an existing loan transaction.

Property value estimates to help identify potentially inflated appraised values.

Year-to-date 2015, LP represented 45% of deliveries (excluding HARP loans), compared to 39% in 2014. However, Freddie Mac
also acquires loans underwritten through other automated underwriting platforms, including Fannie Maes Desktop Underwriter (DU)
or lender- approved contract variances.
The seller benefits from the use of LP, as the applications receiving an LP-accepted risk class can receive rep and warranty relief for
borrower creditworthiness. In addition, LP provides document-gathering guidelines with two documentation levels, standard and
streamlined, and provides alerts received with the credit in files.

Loan Quality Advisor


Lender Quality Advisor (LQA) is a tool for lenders later in the origination process to ensure that, as the loan file builds, the loan
continues to meet Freddie Macs credit risk and eligibility criteria. LQA is a web-based risk and eligibility assessment tool that
evaluates loan data to help lenders determine if a loan is eligible for sale to Freddie Mac when most useful - either pre- or postclosing. LQA key benefits include:

Validation that loans are consistent with Freddie Macs requirements, allowing for changes to be made before the loan closes.

Provides a risk assessment tool for loans not originated using LP by assessing the loan and providing a summary-level
indication of Freddie Macs view of credit risk and associated quality of the loan.

LQA provides purchase eligibility by running data quality and purchase eligibility rules consistent with those run at loan delivery,
allowing the seller to identify and correct potential delivery errors prior to selling the loan to Freddie Mac. Benefits from the use of
LQA include identifying recent changes to guide requirements before the loan closes, reducing the time to fund at loan delivery and
monitoring loan manufacturing defect trends and proactively resolving such before they become delivery problems.

Uniform Mortgage Data Program


Under the direction of FHFA, Freddie Mac and Fannie Mae jointly released the UMDP, which provides a set of common
requirements for appraisal and loan delivery data. Capturing consistent and accurate data dramatically increases the agencys ability
to effectively assess risk on the single-family mortgages it acquires. UMDP provides benefits by standardizing mortgage delivery
data through five datasets and collection methods:

Uniform loan application dataset (ULAD).

Uniform appraisal dataset (UAD).

Uniform collateral data portal (UCDP).

Uniform closing dataset (UCD).

Uniform loan delivery dataset (ULDD).

Selling System
Although data checks are in place during submission of loans through LP, a loan must be separately delivered through the selling
system to be purchased by Freddie Mac. This system is another process through which Freddie Mac is able to control the accuracy
and quality of loans it acquires, as all loans delivered through the selling system are subject to thousands of charter, credit and data
quality checks prior to funding. The data quality checks between LP and the selling system are consistent. Certain data quality
checks may be critical edits that must be resolved before a lender is permitted to set the loan to fund in the selling system.
The selling system uses a standard industry accepted dataset (ULDD) to improve the quality and accuracy of the data submitted and
validates appraisal data submitted through the UCDP, improving collateral data quality on the loans. Freddie Mac indicated during
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
January 7, 2016

22

Structured Finance
the update review that the selling system continues to receive new and improved quality edits and messages to drive even greater
purchase certainty.

Risk Management, Monitoring, and Controls


In order to maintain strong risk management results while acquiring loan production from a large number of sellers, Freddie Mac
emphasizes the processes and tools it has developed to test and monitor the individual loans, as well as its sellers compliance with
guidelines. These processes include:

Mortgage Credit Risk Management (MCRM): Establishes, develops and implements credit policies and risk limits for
sellers/lenders, loan quality and servicers.

Counterparty Credit Management (CCM): Enforces the eligibility requirements to sell loans to Freddie Mac, including approval
requirements, limits and exposure management and monitoring.

CORE: Reviews for sellers effectiveness of controls over mortgage operations and compliance with Freddie Mac requirements.

Post-Purchase Underwriting QC and Credit Analytics: Test the accuracy of the delivered data on purchases and assess
compliance with requirements, completed post-funding for both performing loans (PLs) and nonperforming loans (NPLs).

Loan Acquisition Technology and Risk Management Systems: Enhanced regularly to manage and monitor Freddie Macs
sellers and quality of loans purchased.

Mortgage Credit Risk Management Policy Setting


Through its various units, MCRM is responsible for developing and maintaining the seller/servicer guides and the credit policy, and
approving policy exceptions. Freddie Macs MCRM is an independent department within single-family risk and has transitioned with
the adoption of the Office of the Comptroller of the Currency (OCC) guidelines for minimum standards, issued in September 2014.
Under this new structure, the MCRM has accountability for the areas of:

Mortgage credit and collateral policy (MCP).

Customer credit management (CCM) at the customer level, including:

Negotiated terms of business (TOB).

Customer credit performance.

Insurance Policy (IP) property, flood, title and, etc.

Automated underwriting policy (AUP) and selling system rules and edits.

Credit policy implementation and business management (CPI & BM).

MCRMs credit framework is designed to provide clear accountabilities and authorities, including approval levels, while allowing
flexibility for the business to operate within the companys credit risk tolerance. This is accomplished through its corporate credit
policy (CCP), corporate policy exceptions and seller/servicer guides.

Corporate Credit Policy


Freddie Macs CCP was created in 2007 to define the agencys credit boundaries in accordance with its risk profile. The policy
documents Freddie Macs risk tolerance and includes the seller/servicer guide but goes beyond the guide limits in certain areas
implemented through negotiated TOBs and customer contracts.

Corporate Credit Policy Exceptions


CCP exceptions (CCPEs) are exceptions outside the CCP that must be approved by MCRM but are limited in number, only provided
to sellers with a demonstrated ability to manage the associated risk and are implemented through TOBs in customer contracts.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

23

Structured Finance
Freddie Mac currently approves only about 10% of the exceptions granted pre-2007. However, CCPEs are not negotiated for core
policy credit limits of FICO, DTI, LTV and minimum credit and capacity documentation standards.
The top four most frequently negotiated TOBs are as follows:

Use of the automated underwriting system (AUS), other than Loan Prospector (LP).

Incomplete improvements.

Calculating monthly DTI ratios for deferred student loans.

Calculating the monthly debt-to-income ratio on revolving accounts.

TOBs are negotiated and reviewed annually as part of contract renewals; quarterly and monthly as part of Freddie Mac's review
process; and ad hoc, based on changing policies at Freddie Mac or customer need. The counterparty risk rating is one of many
factors analyzed to determine credit TOB availability.

Freddie Mac Seller/Servicer Guide


The guide is a public document that provides core selling, servicing and delivery requirements. Changes to the selling guide start
with policy changes by the individual policy groups. Changes can occur for a number of reasons, including regulator mandate,
performance issues, QC feedback and market events. Once a necessary change is identified, the policy group researches and
develops the appropriate policy action.

Counterparty Credit Management


Freddie Mac manages its counterparty risk, which is the risk of financial loss to Freddie Mac if a business partner fails to meet its
contractual obligations, through a stringent approval process, credit analysis, limits and exposure caps, as well as continual
monitoring and surveillance. CCM enforces the eligibility requirements to sell loans to Freddie Mac, which include financial capacity,
operational capabilities and reputational considerations. The counterparty approval process includes:

Analysis and management of customer credit performance to identify trends.

Periodic reviews of seller contracts and TOBs to determine if changes are needed.

Development and implementation of action plans and corrective actions, such as modify/remove business terms.

Financial review and background checks.

CCM conducts baseline reviews of all counterparties on an annual schedule, as well as an automated quarterly rating and limited
updates of all single-family counterparties. These reviews cover affirming or changing ratings and limits, approval of TOBs and
ensuring compliance with policies and procedures.
To manage counterparty exposure, Freddie Mac sets and monitors the potential loss if the counterparty fails to meet its contractual
obligations. The exposure may be direct or indirect, secured or unsecured and could vary by term. Based on the reviews, Freddie
Mac maintains a watch list and troubled counterparty designation, which escalates the concerns to senior management.
If material risks are identified, they may result in reduced limits, restricted TOBs, transfer of custodial accounts, collateral/parental
guaranties and/or settlement of counterparty exposure or adverse action (suspension or termination). Seller removals depend on
determining whether the counterparty no longer meets the quantitative measures for inclusion in the watch list. Seller removals from
the watch list are also reviewed with the chief credit officer.

Counterparty Operational Risk Evaluation (Seller Oversight)


In 2011, CORE underwent a significant transformation. This aligned review objectives with business needs and eliminated
redundancies, as well as re-engineered the review process to implement a risk-based approach and provide clear communication of
findings and remediation priorities.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

24

Structured Finance
Through the use of onsite reviews and monitoring the remediation of identified issues, CORE provides Freddie Mac with necessary
information about single-family counterparties effectiveness of controls over mortgage operations and compliance with certain
Freddie Mac requirements. CORE process activities include:

Determining the counterparties to review and the scope and depth of each review.

Conducting the onsite review and communicating results.

Monitoring and validating remediation of the issues noted.

Selection of Sellers for Review


Freddie Macs annual review plan targets counterparties based on the degree of risk posed to Freddie Mac. After a plan is created, it
can be updated through the year with input from key stakeholders. The plan is based on the following guidelines:

The largest sellers/servicers are reviewed one or more times annually.

Other sellers/servicers are risk-assessed annually to determine the need for review or are selected for a review based on
referrals by the business units.

Historically, CORE has reviewed sellers that comprised approximately 70% of Freddie Macs volume on an annual basis. The
number of counterparties reviewed in 2015 is 103 (including applicants) and covered approximately 70% of all 2014 production
volume; 2016volume is expected to be similar.

CORE Review Process


CORE examiners employ a number of methods to understand and assess the counterpartys mortgage operations and controls,
including:

Review of policies and procedures, internal audit reports, management reports and other documentation evidencing the sellers
internal controls.

Observing staff performing a particular function/task or system demonstration to understand processes and identify sources of
risk, control points and possible gaps.

Detail testing of a sample of supporting documentation to validate and assess the effectiveness of the counterpartys controls or
compliance with specific requirements.

CORE typically no longer reviews loan files during its onsite reviews but, instead, relies on and utilizes the results of the file review
through the post-purchase QC review process.
CORE utilizes the operational risk oversight framework to risk rate each finding, considering input from its business unit partners.
Risk ratings are based on the effectiveness of the counterpartys controls and the severity of the impact or the risk to Freddie Mac
and include an assessment of critical, major, other, and observations. Furthermore, CORE will assess the counterpartys overall
control environment based on the aggregation of risk ratings of new and existing open findings. The distribution of overall
assessments of counterparties reviewed in year-to-date 2015 are as follows: satisfactory (33.9%); controls need strengthening
(13.8%); marginal (3.1%); unsatisfactory (6.1%); and reviews without a rating (43.1%).
CORE also conducts reviews of small counterparties and follow-up reviews for issue remediation; these reviews are typically limited
in scope and do not have an overall rating assessment. CORE tracks and monitors the issue status and remediation plans and
collaborates with business unit partners to assess the efficacy and timeliness of counterparty remediation plans. Aged issue reports
are escalated to management and the SF risk committee for critical or major findings.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

25

Structured Finance
Post-Purchase Underwriting QC and Credit Analytics
The Freddie Mac single-family QC process has undergone several enhancements post-crisis that have dramatically improved the
timing, as well as increased the effectiveness and efficiency of loans selected for review. QC tests the accuracy of the delivered data
on purchases to validate the loans and assess compliance with requirements. Results are used to determine ineligible defect rates
of lenders and to assess fees and/or implement action plans for lenders that deliver outside tolerances for defects. Loans are
sampled to mitigate losses, resolve repurchases, provide feedback to policy management, ensure sellers have strong underwriting
processes and validate data quality.
Freddie Mac performs QC post-funding reviews for both PLs and NPLs. QC reviews consist of the periodic sampling and inspection
of newly funded PLs (PL and compliance samples) both random and targeted.
The random sample includes loans pulled from all sellers. The sample size is calculated based on one or more of the following
factors: number of loans funded; historical rate of non-investment quality; and desired level of precision. The random sample size
has continued to decrease since 2011, as size is also based on the defect rate, which has materially decreased. Freddie Mac
indicated it expects the random portion of the loans selected for QC to continue to decrease, as the defect rates are expected to
continue to drop.
The targeted sample includes loans from high-risk new sellers, sellers flagged by QC data parameters and Freddie Macs
counterparty credit risk management area, as well as loans with other high-risk loan attributes. Targeted loans are also selected
based on the additional data available to Freddie Mac from its Uniform Loan Delivery Dataset (ULDD) delivered data, LP
submissions, electronic appraisal information, results of loans not originally submitted through LP (but later put through LP for
comparison) and other sources of data now available.
Enhancements to Freddie Macs QC process post-crisis include:

Accelerated PL reviews to be timelier, allowing for results to sellers on their quality and process typically within six months of
delivery.

Significantly expanding the share of NPLs reviewed.

Obtaining full reverifications on PL loans (matching the NPL process).

Implementing penalty fee and defect rate thresholds for large customers.

Implementing repurchase late fees for nonpayment of repurchase requests.

QC Property Valuations
The original appraisal value of the mortgaged property is reviewed against a value from Freddie Macs automated valuation model,
Home Value Explorer (HVE), when available, as well as a desk review by an underwriter, to assess whether the original appraisal
report supported the value and marketability of the subject property. If HVE values indicate that the original appraisal report
valuation significantly exceeded the HVE-determined value, Freddie Mac will use other tools, including review appraisals, to
determine if the value and marketability of the mortgaged property was supported.
For the 2014 property QC, roughly 2.6% of the NPLs reviewed each month require a third-party valuation to be ordered, while the
percentage is 6.8% for PLs. When the two were combined, a total of approximately 6.0% of the population reviewed required thirdparty valuations to be ordered.

QC Results Defect Rates


Freddie Mac management indicated that based on the results of their quality control reviews, the 95% confidence interval estimate
of the defect rate for non-HARP loans purchased during the three-month period between April 1, 2015 and June 30, 2015 was
approximately 1.0% to 1.4% as of Nov. 30, 2015. Based on reviews completed through September 2015, the estimated weighted
defect rate across all sellers/servicers for all loans funded during 2012, 2013, and 2014 was approximately 2.8%, 1.4%, and 1.0%,
respectively.
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
January 7, 2016

26

Structured Finance
In 2014, the five most common defects found through the Freddie Mac post-purchase QC reviews were:

Insufficient income.

Excessive obligations.

Insufficient funds to close.

Unable to calculate income (documentation).

Appraisal does not support value.

QC Results Re-Underwriting
As part of the QC process, loans are underwritten to purchase documents, guide or contract, as of the funding date. Based on this
review, the underwriting decision will be either acceptable, if the loan is deemed to be of acceptable quality, or repurchase, if
deemed to be of non-acceptable quality. Appeals are allowed for loans that received a notice of repurchase, based on the
seller/servicer guide, which may change remedy decisions.

Defect/Remedy Management
Freddie Mac meets with its larger sellers to discuss deficiencies identified during the PL sampling to help ensure appropriate
changes are made to their underwriting processes. In addition, for all the largest sellers, Freddie Mac actively manages the current
quality of loan originations by providing monthly written and oral communications regarding loan defect rates and the drivers of those
defects. If necessary, Freddie Mac will work with sellers to develop an appropriate plan of corrective action.
In addition, Freddie Macs contracts with a number of its larger sellers give it the right to levy certain penalty fees when mortgage
loans delivered fail to meet its aggregate loan quality metrics. The current acceptable defect rate for lenders is 5%. Those lenders
that have defect rates exceeding the 5% threshold will be assessed a penalty fee for all loans delivered during the applicable time
frame. Freddie Mac indicated that all its largest (national) sellers are currently below the defect threshold.
Freddie Mac maintains ongoing repurchase communications with sellers/servicers and provides them with detailed tracking of
outstanding repurchases. Reports on the aging of repurchases and historical resolution efforts are provided on a loan-level and
aggregated basis. Freddie Mac enforces the reps and warranties of repurchase obligations for noncompliant sellers/servicers
through the remedy management escalation policy, which includes the assessment of late fees for lenders with repurchases aged
greater than 120 days.

Review of QC Decisions Loan Review Quality Assurance Process


Freddie Mac maintains an independent department that samples decisions by the QC department made in the prior month.
Decisions from Freddie Mac underwriters and remedy staff are reviewed for accuracy and compliance. QC responds to the
preliminary draft for any major findings and modifies loan decisions or justifies reasons for maintaining the original decision.

Single-Family Loan Acquisition Technology and Risk Management


Freddie Macs employees within its single-family loan acquisition technology and data group are from the mortgage purchase
operations group within the single-family operations organization. The model governance group at Freddie Mac assesses the risk of
models used at the company on a quarterly basis, with models reviewed periodically, based on the assigned risk ranking.
Furthermore, any significant changes to models are reviewed by the model risk management function prior to deployment for use.
The existing platforms and key applications in this area included:

LP, the GSEs proprietary AUS.

Loan quality advisor (LQA).

Uniform Mortgage Data Program (UMDP) initiatives, including the ULDD and Uniform Collateral Data Portal (UCDP).

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

27

Structured Finance

Selling system.

Quality control information manager (QCIM).

Loan coverage advisor.

Quality Control Information Manager (QCIM)


QCIM is Freddie Macs web-based tool for managing post-funding QC performing and nonperforming loan request and review
results. The system includes management reporting of customized dashboards to access and manage reports and data on QC
samples, loan file deficiencies and file review pipelines. These reports allow for analysis of trends to identify and correct possible
loan manufacturing process deficiencies. The system also assists in the QC loan file request, including tracking, pending and
incomplete loan file requests, as well as missing or incomplete document requests. Finally, the system also helps with the
management of repurchase and remedy requests.

Loan Coverage Advisor


Loan Coverage Advisor is a web-based application that establishes and tracks the representation and warranty relief date for every
loan sold to Freddie Mac, based on the requirements under the selling representation and warranty framework. The system
identifies the terms of obligations for each loan and the counterparties responsible for those obligations.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

28

Structured Finance
Appendix B: Servicing
The servicing of Freddie-Mac-purchased loans will generally be retained by each individual originator/seller if the entity is also an
approved servicer. Freddie Mac oversees and directs activities of servicers, including setting servicing standards and requirements,
monitoring servicer performance, removing servicers at its discretion and approving/denying the transfer of servicing.
Freddie Macs servicer-approval and oversight processes were developed with a specific target of effectively managing the
companys $1.693 trillion single-family guarantee portfolio by reducing credit losses and pre-servicing communities through
responsible loss mitigation and liquidation, improving servicer performance and executing against REO asset management
disposition strategies.

Servicer Eligibility
Freddie Mac, in its oversight role, sets servicing standards and requirements for its loans. In-depth analysis of servicer performance
is conducted for both new and existing Freddie Mac servicers. Acceptable servicers are expected to evidence effectiveness and the
attainment of performance to Freddie Mac standard, and the Agency works with servicers to drive towards continuous performance
improvement.
Freddie Mac has the ability to remove servicers with or without cause. The agency also retains the right to refuse a requested
transfer of servicing from one servicer to another. In addition, the agency also retains the right to transfer portfolios when it feels the
need to facilitate better outcomes. Freddie Mac continues to work with servicers to transfer high risk portfolios to specialty servicers.
Over the past 12 months, the Agency has transferred approximately 240,000 loans with a UPB of $38 billion.
Over the past 12 months, Freddie Mac removed or denied 10 servicers. Also during this time period, approximately 100 servicers
voluntarily terminated, predominantly due to low activity.

Policy and Compliance Oversight


Freddie Macs Servicing Policy team is responsible for developing mortgage servicing policies and changes to the Single Family
Seller/Servicer Guide. The guide contains Freddie Macs servicing requirements and links to relevant bulletins and industry updates.
The team works with the FHFA, industry participants, and internal partners to develop solutions to servicing issues.
Freddie Mac and Fannie Mae, under the direction of their regulator, FHFA, have implemented a Servicing Alignment Initiative (SAI)
designed to establish consistent policies and processes for the servicing of delinquent loans owned or guaranteed by the GSEs. The
program was created to include a series of carrots and sticks to motivate the right servicer behavior, and to ensure that servicers are
better and more consistently prepared to help at-risk homeowners.
The main aspects of SAI are borrower contact, delinquency management practices, loan modifications and foreclosure alternatives
and foreclosure timelines. Under SAI, servicers are motivated by tiered loan modification incentives tied to solution delivery timing
and uniform compensatory fees.
While Freddie Mac focuses a considerable effort on performance trend analysis and servicer optimization strategies, the Agency has
well-established methodologies for ensuring compliance with its policies and guidelines. The Servicing Quality Assurance team
conducts post-acquisition loan file reviews to evaluate servicer compliance with Freddie Mac requirements for managing delinquent
loans and workout alternatives, and identifies remedies for non-compliance. Freddie Mac views its loan file reviews as an on-going
collaborative process between the Agency and its servicers.
The loan file reviews include an assessment of the servicers collection and solicitation activities, loss mitigation efforts, property
preservation through timely inspections and foreclosure time-line management requirements.
Fitch believes that Freddie Mac employs effective data analytics tools and structural mechanisms in its policy and compliance
oversight initiatives.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

29

Structured Finance
Servicer Performance Monitoring and Management
Freddie Macs Servicing Success Program defines, measures, and promotes servicing best practices. It aims to establish with
servicers a mutual understanding of quality servicing. Under this Program, performance objectives are set, and broad, in-depth
analysis of performance is provided. The framework supports ongoing discussions between Freddie Mac and servicers on
performance.
Freddie Macs Servicing Relationship Management team is responsible for managing the performance of the companys 1,250
national, regional, and community servicers. Over 70 servicers have been added in 2015. This team establishes relationships with
servicers in order to drive improvement in operational performance and focus on credit loss, while considering homeownership
preservation goals. Relationship managers average over 25 years of industry experience, and over six years with Freddie Mac.
Freddie Macs servicer management strategy focuses heightened scrutiny of the top ten servicers by loans serviced, representing
68% of the portfolio in aggregate, and those with 25 or more seriously delinquent loans in the portfolio. These servicers are actively
managed by assigned account managers; approximately 40 entities are in this managed group; making up approximately 84% of
the portfolio. The assigned account managers work with the servicers to identify opportunities for ongoing improvement in loan and
portfolio status. Over the past year, the transition to 60 days delinquent for the entire portfolio has decreased from 0.51% to 0.43%.
Freddie Macs Customer Performance Management team is responsible for providing and maintaining a consistent framework for
business protocols, approval authority, and account management of negotiated terms of business, risk evaluation and customer
support.
On-site reviews of servicers are performed by the CORE group. Counterparties are selected by the degree of risk posed to Freddie
Mac. CORE creates and updates its servicer review plan on a semiannual basis, with input from internal stakeholders. National
servicers are reviewed one or more times annually, and large regional servicers and subservicers are reviewed annually, with the
remaining regionals on a rotational schedule. Smaller community servicers are selected based on performance risk metrics and
referral by the business units.

Servicer Scorecards
Freddie Mac provides servicers with monthly scorecard summaries of key servicing metrics, which includes information on both the
subject entity and peer aggregates. The scorecards are delivered via the servicer performance profiles (SPP) website. Freddie
Macs servicer scorecards include individual performance targets or rankings, metric weights and synthetic portfolio/peer
comparisons.
The scorecards contain performance metrics on loss mitigation and foreclosure alternatives, investor reporting, default management,
and file review defect rates. They also provide historical views of the servicers performance, a rank order of performance relative to
other servicers, and for larger entities, individualized goals and objectives.
Freddie Mac continues to seek out ways to improve on its analytics and the use of its metrics in its scorecards. For example, the
Agency has included an emphasis on positive outcomes, such as a return to current status. Also reflecting changes in servicing, the
scorecard now has increased weighing on transitions to 60 days delinquent, which emphasizes early collections.

HomeSteps REO Program


The stated mission of Freddie Macs HomeSteps REO program is to effectively manage credit losses in a way that provides
affordable housing opportunities and benefits communities.
Freddie Mac has identified a number of goals in order to succeed in this mission. One key goal includes a focus on improving
collateral values. The Agency has refined its valuation methodology; incorporating a repair strategy directed at improving sales
prices and return on investment, and frequent market area reviews and analytics to adjust sales and pricing strategies. Freddie Mac
management indicated that since 2012 a net benefit of approximately $500 million has been realized from this effort.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

30

Structured Finance
The Agency has also focused effort on the management of expenses. Freddie Mac monitors asset expenditures at the account
group level; it conducts business model reviews for savings and efficiencies, and negotiates volume discounts with vendors for
service fees.
Freddie Mac also aims to ensure effective management and collection of hazard insurance, primary MI, pool MI, repurchase claims,
and other available remedies. Freddie Mac management indicated that since 2009 it has collected $5 billion in remedies.
Further goals of HomeSteps include the proper preservation, maintenance and repair of homes and the pricing of homes at fair
market value. Freddie Mac aims to adhere to the highest quality of preservation, maintenance and repair standards, in order for their
homes to look as good as or better than others in the market. Furthermore, the Agency aims to price and sell homes in-line with
other retail sales in the community. Freddie Mac management indicated that HomeSteps is currently repairing approximately 70% of
its inventory, and that since 2009 theyve sold nearly 500,000 homes, recovering 95% of their established market value.
Fitch has reviewed Freddie Macs HomeSteps program, which incorporates core REO processes that are outsourced with Freddie
Mac oversight and REO support and financial functions that are managed by Freddie Mac staff, and believes that the agency has an
effective process in place for REO management.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

31

Structured Finance
Appendix C: Rating Sensitivity
Fitchs analysis incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value
declines (MVDs) than assumed at the MSA level. 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 that may be
considered in the surveillance of the transaction. Two sets of sensitivity analyses were conducted at the state and national
level to assess the effect of higher MVDs for the subject pool.

Defined Stress: Additional Decline in sMVD at the National Level


This defined stress sensitivity analysis demonstrates how the
ratings would react to steeper MVDs at the national level. The
analysis assumes MVDs of 10%, 20%, and 30%, in addition to
the model-projected 25.0% at the BBBsf level, 23.4% at the
BBBsf level and 15.6% at the Bsf level. As shown in the
table at right, the analysis indicates that there is some potential
rating migration with higher MVDs, compared with the model
projection.

Defined Stresses
(%)
Additional Decline
Original Rating

10%

20%

30%

BBBsf

BBBsf

BBsf

Bsf

BBBsf

BBBsf

BBsf

<Bsf

Bsf

Bsf

< Bsf

< Bsf

Defined Sensitivities: Additional Decline in sMVD at the National Level


The defined rating sensitivities determine the stresses to MVDs
that would reduce a rating by one full category, to noninvestment grade and to CCCsf. The percentage points
shown in the table at right reflect the additional MVDs that
would have to occur to impact ratings for each defined
sensitivity for this transaction.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Defined Sensitivities
(%)
Reduced Rating
One Full
Category

Non-Investment
Grade

To CCCsf

BBBsf

10

10

32

BBBsf

10

28

Bsf

11

11

Original Rating

32

Structured Finance
Appendix D: Third-Party Due Diligence
As per Fitchs criteria, third-party loan-level results were reviewed by Fitch for this transaction. The due diligence company,
Opus, examined selected loan files with respect to the presence or absence of relevant documents. Fitch received
certifications indicating that the loan-level due diligence was conducted in accordance with its published standards. The
certifications also stated that the company performed its work in accordance with the independence standards, as
per Fitchs criteria, and that the due diligence analysts performing the review met Fitchs criteria of minimum years
of experience.
The due diligence sample consisted of 850 loans randomly chosen by Opus out of approximately 5,064 eligible loans
acquired between April 1, 2015 and June 30, 2015 for which Freddie Mac had completed post-purchase QC reviews. The
scope of the due diligence engagement covered:

Credit and compliance reviews.


Property valuation reviews.
Data integrity.

Of the loans sampled, the table at right reflects Opus final overall grades
(using Fitchs event grades) and loan counts.

Overall Fitch Grade Summary


Final Overall Grade
A

Total Loan Count


846

D
Total

2
850

Credit Findings
Opus performed credit reviews to determine whether loans conformed to
Freddie Macs underwriting and eligibility guidelines. Two loans were identified by Opus as a grade D loan for credit, due
to a missing credit report or missing income documentation. Freddie Mac has removed these loans from the reference pool.
Based on Fitchs review and the positive opinion of Freddie Macs lender/seller reviews (which include a comprehensive
review of the lenders QC processes), post-close loan file reviews and servicer oversight, Fitch does not believe that a PD
adjustment is necessary to address these findings.

Compliance Findings
The compliance review differs from Fitchs criteria as the review was based on Freddie Macs Anti-Predatory Lending
Compliance Review and Loan Document Inventory guidelines. While the review does not examine all the documents
necessary to ensure that the loan complies with all applicable federal, state and local laws and regulations, Freddie Mac
validates the absence of any anti-predatory lending issues that could lead to assignee liability. Freddie Mac also relies on
seller reps and warranties to ensure compliance with all laws, including consumer protection laws. Of the 850 loans, 256
loans were reviewed, and all files contain the final truth-in-lending disclosure and satisfy all other compliance
documentation requirements.
For all the loans in the due diligence population, Opus confirmed that the loan application was signed by all borrowers, and
if not, it confirmed the file contained the appropriate signed borrower authorization(s).
All 256 loans reviewed for compliance were graded A.

Property Valuation Review Findings


For the sample pool of loans, all the loans contained original, or copies of, standard FNMA/FHLMC appraisals. Opus found
the appraisals, in general, to be of average quality based on content and acceptable support of the indicated value.
Opus ordered retrospective AVM reports on the 605 loan samples. Additional valuation products were completed for loans
where the AVM returned greater than a negative 10% variance, an appraisal more than 120 days before the note date or if
there were inconsistencies or problems with the original appraisal. A secondary valuation review included ordering an
enhanced product, such as a Retro Collateral Desktop Analysis (CDA). If the result of the CDA reflected a greater than 10%
variance, a third valuation, a retrospective field review, was completed.
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
January 7, 2016

33

Structured Finance
Two loans were graded C due to the appraised values not being supported (variances of 21.9% and 38.4%). These two loans
were removed from the reference pool.

Data Integrity Findings


Opus compared the loan tape with the files reviewed for any data discrepancies. There were a total of 35 data differences,
which are noted in the table below. Of the 35 data discrepancies, 10 were difference in property type, 8 were differences in
the first time homebuyer flag, 7 were differences in DTI and 7 were differences in CLTV. Given the minimal findings, no
adjustment was made to the levels.

Data Integrity Findings


Data Difference

Count of Findings

Tape Value (%)

Review Value (%)

DTI (Back) > 5.0% lower

32

26

DTI (Back) > 5.0% higher

26

41

DTI (Back) b/ 2.0% and 5% higher

27

31

CLTV

73.3

85.6

First Payment Date

May 2015

June 2015

First Time Home Buyer

Yes

No

First Time Home Buyer

No

Yes

Maturity Date

May 2045

April 2045

Property Type

10

Number of Units

Total

35

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

34

Structured Finance
Appendix E: Exchangeable Notes
Holders of the original notes may exchange all or part of each class of such original notes for a proportionate interest in the
modifications and combinations (MAC) notes in the related exchangeable combination. The holders of each class of MAC
notes in an exchangeable combination may also exchange all or part of such class for a proportionate interest in each class
of related original notes. This process may occur repeatedly.
In the event that any original notes are exchanged for the related exchangeable combination, such MAC notes in the
exchangeable combination will be entitled to a proportionate share of the principal and interest distributions on each class
of related original notes. In addition, the MAC notes in an exchangeable combination will bear a proportionate share of
losses and interest shortfalls, as applicable, allocable to each class of related original notes.

Exchangeable Notes
MAC Notes
M-1F
M-1I
M-2F
M-2I
M-3F
M-3I
M-12
MA

Expected
Rating
BBBsf
BBBsf
BBBsf
BBBsf
Bsf
Bsf
BBBsf
Bsf

Expected Rating
Outlook
Stable
Stable
Stable
Stable
Stable
Stable
Stable
Stable

Amount ($)
252,000,000
a
252,000,000
240,000,000

CE (%)
3.95
N.A.
2.95
N.A.

240,000,000a
468,000,000
468,000,000a
492,000,000
960,000,000

1.00
N.A.
2.95
1.00

Interest Rate (%)


TBD
TBD
TBD
TBD
TBD
TBD
TBD
TBD

ISIN/CUSIP
3137G0HR3
3137G0HS1
3137G0HU6
3137G0HV4
3137G0HX0
3137G0HY8
3137G0JA8
3137G0JB6

Notional principal amount. N.A. Not applicable. TBD To be determined.

Exchangeable Combinations
Combination

Original Notes

Amount ($)

M-1

252,000,000

M-2

240,000,000

M-3

468,000,000

M-1
M-2
M-3
M-1
M-2

252,000,000
240,000,000
468,000,000
252,000,000
240,000,000

Interest Rate (%)


TBD
TBD
TBD
TBD
TBD
TBD
TBD
TBD

MAC Notes
M-1F
M-1I
M-2F
M-2I
M-3F
M-3I

Amount ($)
252,000,000
252,000,000a
240,000,000
a
240,000,000
468,000,000
468,000,000a

Interest
Rate (%)
TBD
TBD
TBD
TBD
TBD
TBD

MA

960,000,000

TBD

M-12

492,000,000

TBD

Notional amount. TBD To be determined.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

35

Structured Finance
Appendix F: Transaction Overview
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
Class
a
A-H
M-1b
a
M-1H
b
M-2
a
M-2H
M-3b
a
M-3H
B
a
B-H
Total

Expected
Ratings
NR
BBBsf
NR
BBBsf
NR
Bsf
NR
NR
NR

Expected
Rating Outlook
N.A.
Stable
N.A.
Stable
N.A.
Stable
N.A.
N.A.
N.A.

Size (%)
95.00
0.71
0.34
0.67
0.33
1.31
0.64
0.10
0.90
100.00

Size ($ Mil.)
33,937.85
252.00
123.10
240.00
117.24
468.00
228.62
36.00
321.24
35,724.06

CE (%)
5.00
3.95
3.95
2.95
2.95
1.00
1.00
0.00
0.00

Interest
Rate (%)
N.A.
TBD
N.A.
TBD
N.A.
TBD
N.A.
TBD
N.A.

U.S. RMBS
Final Maturity
N.A.
July 2028
N.A.
July 2028
N.A.
July 2028
N.A.
July 2028
N.A.

ISIN/CUSIP
N.A.
3137G0HQ5
N.A.
3137G0HT9
N.A.
3137G0HW2
N.A.
3137G0HZ5
N.A.

Classes A-H, M-1H, M-2H, M-3H and B-H are reference tranches only. These classes are not issued or sold. The risk is retained by Freddie Mac. bOriginal
notes, which can be exchanged for modifications and combinations (MAC) notes. See Appendix E for more information on MAC notes and exchangeable
combinations. NR Not rated. N.A. Not applicable. TBD To be determined.

Key Information
Details:
Expected Closing Date
Country of Assets and Type
Country of Issuer
Analyst
Performance Analyst

Jan.21, 2016
U.S./RMBS
U.S.
Rachel Noonan
+1 212 908-0224
Rachel Noonan
+1 212 908-0224

Parties:
Issuer
Title of Series
Global Agent
Originators
Master Servicer
Lead Managers

Key Rating Drivers


High Quality Mortgage Pool: The reference mortgage loan pool consists
of 144,144 high quality mortgage loans totaling $35.7 billion that were
acquired by Freddie Mac between April 1, 2015 and June 30, 2015. The
pool consists of loans with original loan-to-value ratios (LTVs) of over 60%
and less than or equal to 80% with a weighted average (WA) original
combined LTV of 76%. The WA debt-to-income (DTI) ratio of 35% and
credit score of 754 reflect the strong credit profile of post-crisis mortgage
originations.

Freddie Mac
Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P.
Morgan Securities LLC

Actual Principal Payments

Specified Credit Events

Class A-H
(Reference Tranche Only)
Reference Pool

Freddie Mac

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

Freddie Mac
Structured Agency Credit Risk Debt Notes, Series 2016-DNA1
U.S. Bank N.A.
Various

Freddie Mac pays coupon on


Notes, which could be reduced
due to loan modifications, and its
obligation to repay principal on
the Notes is reduced for credit
events, and in certain instances
modifications on the Reference
Pool based on an actual loss
approach

Class M-1
(Note and Corresponding
Reference Tranche)

Class M-1H
(Reference Tranche
Only)

Class M-2
(Note and Corresponding
Reference Tranche)

Class M-2H
(Reference Tranche
Only)

Class M-3
(Note and Corresponding
Reference Tranche)

Class M-3H
(Reference Tranche
Only)

Class B
(Note and Corresponding
Reference Tranche)

Class B-H
(Reference Tranche
Only)

36

Structured Finance

The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE
LIMITATIONS
AND
DISCLAIMERS
BY
FOLLOWING
THIS
LINK:
HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS
OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE AT WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES.
FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE,
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT
SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY
OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS
BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON
THE FITCH WEBSITE.
Copyright 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004.Telephone:
1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except
by permission. All rights reserved. In issuing and maintaining its ratings, Fitch relies on factual information it receives from
issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the
factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that
information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction.
The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the
nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered
and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the
issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures
letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the
availability of independent and competent third-party verification sources with respect to the particular security or in the
particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchs ratings should understand that neither an
enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection
with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the
information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings Fitch must rely
on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal
and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events
that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by
future events or conditions that were not anticipated at the time a rating was issued or affirmed.
The information in this report is provided as is without any representation or warranty of any kind. A Fitch rating is an opinion
as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that Fitch is
continuously evaluating and updating. Therefore, ratings are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared
authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein.
The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for
the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the
securities. Ratings may be changed or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not
provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or
taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors,
and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency
equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or
guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall
not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the
United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of
any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available
to electronic subscribers up to three days earlier than to print subscribers.

Structured Agency Credit Risk Debt Notes, Series 2016-DNA1


January 7, 2016

37