OREANDA-NEWS. June 04, 2015. Fitch Ratings has published a sector-specific report for rating state housing finance agency (SHFA) bonds secured, on a pass-through basis, primarily by mortgage-backed securities (MBS), guaranteed by the Governmental National Mortgage Association (Ginnie Mae), mortgage pass-through certificates (hereafter referred to as MBS) guaranteed by The Federal National Mortgage Association (Fannie Mae) or MBS guaranteed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and pledged to the trustee for the holders of the bonds.

The report identifies factors considered by Fitch in assigning ratings to SHFA MBS pass-through bonds within the scope of the criteria. No changes to the ratings of existing bonds are anticipated as a result of the publication of the rating criteria.

Fitch has identified three key rating drivers that affect the credit quality of MBS pass-through bonds:

--Government-Sponsored Enterprise (GSE) Guaranty: Fitch views the primary driver of the rating to be Fannie Mae, Ginnie Mae and/or Freddie Mac (collectively the GSEs) unconditional guarantee of full and timely payment on the MBS securing the bonds. Consequently, the performance of the underlying loans or MBS servicer is not factored into the rating on the bonds.

--Transaction and Legal Analysis: The transaction documents are reviewed to verify that specific structural features are in place and that the pass-through securities provide full and timely payment to bondholders. The analysis is focused on the pledge of MBS revenues and timing provisions for payment on the underlying MBS, as well as the structure governing the flow of funds to bondholders, timing of payments to bondholders and, when relevant, reserve accounts.

Fitch confirms in the legal documents that MBS principal repayments are passed through to pay or prepay a like amount of principal on the bonds so that, throughout the term of the bonds, the MBS principal amount equals or exceeds the outstanding bond amount.

--Cash Flow Analysis: Fitch reviews preliminary cash flows from a third party in assigning a rating to determine that the legal document provisions, including the MBS principal amounts, interest rates, timing of payments, fee structure and sizing of reserves (if any), are accurately reflected. The cash flows demonstrate payment of scheduled principal and interest on the bonds with no mortgage prepayments as well as with various stressed prepayment assumptions.

Fitch reviews final cash flows, prepared by a third party following the pricing of the bonds, to verify that projections and assumptions contained in preliminary cash flows and on which Fitch's rating is based, do not materially differ from the actual MBS deposited into the trust.

The criteria report outlines how Fitch evaluates these factors in its rating analysis of MBS pass-through bonds.