U.S. - Structured Finance

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1 U.S. - Structured Finance Presale Report RMBS Citigroup Mortgage Loan Trust 2014-J1 Mortgage Pass-Through Certificates, Series 2014-J1 Ratings Analysts Howard Ng Senior Financial Analyst [email protected] Corina Gonzalez Vice President [email protected] Quincy Tang Managing Director [email protected] Kathleen Tillwitz Managing Director [email protected] Debt Class Balance ($) Interest Rate Credit Enhancement Notes: 1. Interest-only certificates. The class balances represent notional amounts. 2. Exchangeable certificates. These classes can be exchanged for combinations of initial exchangeable certificates as specified in the offering documents. 3. Super senior classes. These classes benefit from additional protection from the senior support bond (i.e., Class A2) with respect to loss allocation. Rating Rating Action Class A ,222,000 Lesser of Net WAC and 3.50% 9.525% AAA (sf) New Rating Provisional Class A1IO 1,3 197,222,000 Net WAC minus 3.50% 9.525% AAA (sf) New Rating Provisional Class A1W 2,3 197,222,000 Net WAC 9.525% AAA (sf) New Rating Provisional Class A2 6,921,000 Lesser of Net WAC and 3.50% 6.350% AAA (sf) New Rating Provisional Class A2IO 1 6,921,000 Net WAC minus 3.50% 6.350% AAA (sf) New Rating Provisional Class A2W 2 6,921,000 Net WAC 6.350% AAA (sf) New Rating Provisional Class A 2 204,143,000 Lesser of Net WAC and 3.50% 6.350% AAA (sf) New Rating Provisional Class AIO 1,2 204,143,000 Net WAC minus 3.50% 6.350% AAA (sf) New Rating Provisional Class AW 2 204,143,000 Net WAC 6.350% AAA (sf) New Rating Provisional Class B-1 2,943,000 Net WAC 5.000% AA (sf) New Rating Provisional Class B-2 2,752,000 Net WAC 3.750% A (sf) New Rating Provisional Class B-3 3,052,000 Net WAC 2.350% BBB (sf) New Rating Provisional Class B-4 2,289,000 Net WAC 1.300% BB (sf) New Rating Provisional Class B-5 2,833,825 Net WAC N/A NR N/A This table does not include the Class LT-R and Class R Certificates that are both entitled to the residual interest, which are not rated by DBRS. All interest rates are floored at 0%. Table of Contents Ratings 1 Trust Administrator 18 Transaction Summary 2 Transaction Structure 19 Strengths 2 Transaction Diagram 19 Challenges and Mitigating Factors 2 Cash Flow Structure and Features 19 Transaction Parties and Relevant Dates 4 Cash Flow Analysis 21 Rating Rationale 4 Rating Category Analysis 22 Credit Analysis Details 5 Third-Party Due Diligence 23 Collateral Description 5 Representations and Warranties 24 Key Probability of Default Drivers 6 Enforcement Mechanism 24 Key Loss Severity Drivers 8 Sponsor Backstop 26 Aggregator, Originators & Historical Performance 10 DBRS Viewpoint 26 Aggregator 10 Rule 17g-7 Report 27 Originators 12 Methodologies Applied 27 Servicers and Trust Administrator 14 Monitoring and Surveillance 27 Servicers 14

2 Transaction Summary Citigroup Mortgage Loan Trust 2014-J1 (CMLTI 2014-J1) is a securitization of a portfolio of fixed-rate prime residential mortgages funded by the issuance of mortgage pass-through certificates. The certificates are backed by 285 loans with a total principal balance of $217,985,825 as of the Cut-off Date 1. The mortgage loans were acquired by Citigroup Global Markets Realty Corp. (Citi). The originators for the mortgage pool are Stearns Lending, Inc. (Stearns, 33.5%), Nationstar Mortgage LLC (Nationstar 30.3%), Freedom Mortgage Corporation (FMC, 11.3%), and various other originators, each comprising less than 5% of the mortgage loans. The loans will be serviced by Nationstar (71.1%), Fay Servicing, LLC (Fay, 23.0%), Fifth Third Mortgage Company (Fifth Third, 3.2%) and PennyMac Corp. (PennyMac, 2.8%). Deutsche Bank National Trust Company (DBNTC) will act as the Trust Administrator and Custodian. The transaction employs a senior-subordinate shifting-interest cash flow structure that is enhanced from a pre-crisis structure. Strengths (1) Higher Quality Loans with Good Distribution of Credit Attributes: This transaction exhibits highquality credit attributes in borrower credit, loan-to-value (LTV) ratios, debt-to-income (DTI) ratios and documentation. Compared with other recently issued prime jumbo transactions, this portfolio contains a very strong FICO score, combined LTV and DTI ratios with much less barbelled distributions. In addition, the pool contains 5.1% 15-year mortgages and no interestonly loans. (2) Well-Qualified Borrowers: The mortgage loans in the transaction were originated to high income borrowers with significant reserves. The loans that are subject to the Qualified Mortgage (QM) and Ability-to-Repay (ATR) rules are categorized as Safe Harbor. (3) 100% Current Loans: All loans are current as of the Cut-off Date. No loan has had prior delinquencies since origination. (4) Third-Party Due Diligence Review: Third-party due diligence firms conducted credit and compliance reviews on 100.0% of the loans in the pool. In addition, all but 17 loans were reviewed for original property valuation. With respect to the 17 mortgage loans, the Sponsor obtained an updated valuation of the related mortgaged property. Data integrity checks were also performed on the pool. (5) Structural Enhancement: Compared with a pre-crisis shifting-interest structure, the transaction employs a subordination floor to address tail risk and retain credit support. Challenges and Mitigating Factors (1) Entities Lack Financial Strength: Some of the originators in the transaction may have limited history in prime jumbo securitizations and/or may potentially experience financial stress that could result in the inability to fulfill repurchase obligations as a result of breaches of representations and warranties. DBRS notes the following mitigating factors: 1. The collateral description and disclosure on the mortgage loans in this report reflect the approximate aggregate characteristics as of the Cut-off Date. 2 Presale Report Structured Finance: U.S. RMBS

3 The loans, except for the Fifth Third Bank-originated mortgages (DBRS rates Fifth Third Bank at A, stable), benefit from representations and warranties backstopped by Citigroup Global Market Realty Corp. (Citi), a wholly owned subsidiary of Citigroup Inc. (DBRS rates Citigroup Inc. at A (low), Stable), in the event of an originator s bankruptcy or insolvency proceeding and if the originator fails to cure, repurchase or substitute loans for such breach. However, the backstop is subject to certain sunset provisions with respect to underwriting and fraud, described further in this report. DBRS adjusted the originator scores of certain lenders to account for the potential inability to fulfill repurchase obligations or the lack of performance history. A lower originator score results in increased default and loss assumptions and provides additional cushions for the rated securities. Third-party due diligence was conducted on 100.0% of the loans in the pool. A comprehensive due diligence review mitigates the risk of future representations and warranties violations. The loans in this transaction were aggregated by the Citi Jumbo Conduit Program (Citi Conduit) established in April The performance of the recent Citi prime jumbo securitization, though limited in history, has been satisfactory to date. Also, DBRS conducted an aggregator and deemed them acceptable. (2) Representations and Warranties Standard: Although the originators do provide traditional lifeof-loan representations and warranties to the trust, the backstop provided by Citi includes sunset provisions on representations and warranties with respect to underwriting and fraud. Some mitigating factors include Excluding the sunset provisions on underwriting and fraud, the representation and warranties standards for this transaction have many positive features that include the following: (a) Life-of-loan originator representation and warranties. (b) Automatic breach review will be triggered by the following events: i) a loan becomes seriously delinquent (120 days or more); (ii) a loan incurs a loss upon liquidation. (c) Disputes related to breaches may be ultimately settled by arbitration proceedings. (d) Sunset provisions for the backstop give consideration to prior loan performance. Third-party due diligence was conducted on 100.0% of the pool, diminishing the risk of future representations and warranties violations. DBRS assigned additional penalties and adjusted certain loan attributes based on thirdparty due diligence results, to provide added cushion in its expected losses analysis. (3) Servicers Financial Capability: Although operationally sound, some servicers may face financial difficulties in fulfilling their servicing advance obligations in the future. Consequently, the transaction employs Deutsche Bank National Trust Company (DBNTC) as the Trust Administrator. If the applicable servicer fails in its obligation to make advances, DBNTC will be obligated to fund such servicing advances. DBNTC also assumes the role of the Paying Agent and Custodian, as well as managing the claims arising from alleged breaches of representations and warranties. The above strengths and challenges, along with other transaction details, are discussed in depth in the relevant sections of this report. 3 Presale Report Structured Finance: U.S. RMBS

4 Transaction Parties and Relevant Dates Transaction Parties Type Name Issuing Entity Citigroup Mortgage Loan Trust 2014-J1 Sponsor and Mortgage Loan Seller Citigroup Global Markets Realty Corp. Depositor Citigroup Mortgage Loan Trust Inc. Originators Stearns Lending, Inc. 33.5% Nationstar Mortgage LLC 30.3% Freedom Mortgage Corporation 11.3% Other Originators 25.0% Servicers Nationstar Mortgage LLC 71.1% Fay Servicing 23.0% Fifth Third Mortgage Company 3.2% PennyMac Corp. 2.8% Trust Administrator & Custodian Deutsche Bank National Trust Company Trustee Wilmington Savings Fund Society, FSB, d/b/a Christiana Trust Relevant Dates Type Date Cut-Off Date June 1, 2014 Expected Closing Date June 27, 2014 Payment Date The 25th of each month or the next succeeding business day commencing in July Final Scheduled Distribution Date The distribution date in June Rating Rationale The DBRS rating of the certificates addresses the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the certificates. DBRS based the rating primarily on the following: The transaction's capital structure and the form and sufficiency of available credit enhancement. Relevant credit enhancement in the form of subordination. Credit enhancement levels are sufficient to support DBRS-projected expected cumulative loss assumptions under various stressed cash flow assumptions for the rated classes. The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms of the transaction documents. The originators and servicers capabilities with respect to originations, underwriting, servicing and financial strength. The credit quality of the collateral and ability of the servicers to perform collection activities on the collateral pool. The legal structure and presence of legal opinions addressing the assignment of the assets to the issuer and the consistency with the DBRS Legal Criteria for U.S. Structured Finance Transactions. DBRS s ratings do not address the likelihood that there may be interest shortfalls as a result of the occurrence of extraordinary trust expenses in any given month. 4 Presale Report Structured Finance: U.S. RMBS

5 Credit Analysis Details Collateral Description The table below highlights the key collateral characteristics and expected losses for CMLTI 2014-J1. Collateral Comparison (at Closing) 2 Pool Attributes CMLTI 2014-J1 CMLTI 2013-J1 Number of Loans Outstanding Pool Balance $217,985,825 $209,953,196 Original Pool Balance $223,239,576 $212,271,195 Average Loan Balance $764,863 $766,253 WA Coupon 4.000% 3.865% WA FICO WA Original Combined LTV 68.6% 67.6% WA DTI Ratio 28.2% 28.0% WA Seasoning 11 months 4 months Piggyback Seconds 0.9% 0.0% Interest Only 0.0% 0.0% Fixed Rate 100.0% 100.0% Origination Channel Retail 23.2% 17.4% Broker 71.5% 80.2% Correspondent 5.3% 2.4% Occupancy Primary Residence 98.6% 98.4% Second Homes 0.5% 1.6% Investor-owned 0.9% 0.0% Loan Purpose Purchase 32.9% 29.9% Rate/Term Refinance 63.6% 62.8% Cash-Out Refinance 3.5% 7.3% Documentation Type Issuer-Defined Full Documentation 100.0% 100.0% DBRS-Defined Full Documentation % 100.0% Property Type Single Family (incl. PUD & TH) 99.6% 99.8% 2-to-4 Family 0.0% 0.0% Condo and Co-Op 3.4% 0.2% Qualified Mortgage Designation QM Safe Harbor 12.3% N/A QM Rebuttable Presumption N/A N/A Non-QM N/A N/A Not Subject to QM 87.7% 100% Geographic Concentration 2. All characteristics in this table or in this report reflect the attributes that DBRS used in its credit analysis, and may not conform to the disclosure in the transaction documents. Certain attributes, including FICO, LTV and documentation types, have been adjusted based on the DBRS review of the third-party due diligence results, Case-Shiller home price indices and other relevant assessments, as described further in the related sections. 3. Certain documentation types have been adjusted based on DBRS s review of the third-party due diligence results. 5 Presale Report Structured Finance: U.S. RMBS

6 State % (CA) 49.9% (CA) State 2 6.7% (FL) 7.1% (TX) State 3 6.2% (IL) 6.9% (CO) Originators (Top 3) Originator 1 Originator 2 Originator 3 Servicers (Top 3) Servicer 1 Servicer 2 Servicer 3 Loss Expectation at Closing 33.5% (Stearns) 30.2% (Nationstar) 11.3% (FMC) 71.1% (Nationstar) 23% (Fay) 3.2% (Fifth Third) 43.7% (Nationstar) 28.5% (Stearns) 12.3% (FMC) 92.5% (Nationstar) 7.5% (Fifth Third) AAA (sf) 5.45% 5.30% AA (sf) 4.35% 4.25% A (sf) 3.25% 3.25% BBB (sf) 2.00% 2.25% BB (sf) 1.00% 1.25% B (sf) 0.50% 0.50% N/A The CMLTI 2014-J1 pool exhibits collateral attributes generally high in credit quality and consists of fixedrate mortgages for fully documented borrowers. As compared with other recently-issued prime jumbo transactions, this portfolio contains a very strong FICO score, combined LTV and DTI ratios, with much less barbelled distributions. In addition, the pool contains 5.1% 15-year mortgages and no interest-only loans. DBRS uses its proprietary RMBS Insight model to derive probability of defaults, loss severities and expected losses for the CMLTI 2014-J1 portfolio. The figures below represent the probability of defaults, loss severities and expected losses on the portfolio, generally rounded up from the raw model results. DBRS Default Probability, Loss Severity and Expected Loss for CMLTI 2014-J1 Rating Probability of Default Loss Severity Expected Loss AAA (sf) 13.15% 41.43% 5.45% AA (sf) 11.44% 38.02% 4.35% A (sf) 9.08% 35.80% 3.25% BBB (sf) 6.34% 31.56% 2.00% BB (sf) 3.79% 26.36% 1.00% B (sf) 2.41% 20.72% 0.50% Key Probability of Default Drivers LTV Ratio and Future Equity For certain more seasoned loans where updated valuations are not provided, DBRS indexed the original property values using the Case-Shiller home price indices within their proper price tiers (when price tiers are available); however, property appreciation is not always rewarded. The DBRS-calculated weighted-average original CLTV of 68.6% suggests that borrowers have considerable equity in their homes. While approximately 0.9% of the pool has piggybacks, these loans represent a strong weighted-average original CLTV of 74.2%. There are no second liens included in this pool. 6 Presale Report Structured Finance: U.S. RMBS

7 DBRS calculates future equity (in two years) for every loan using its metropolitan statistical area (MSA)- level base home price forecast model and applies additional market value decline (MVD) assumptions by rating category (described further in the Key Loss Severity Drivers section). The top three MSAs in this pool are San Diego-Carlsbad-San Marcos, California (10.4 of the pool), San Jose-Sunnyvale-Santa Clara, California (8.5% of the pool) and San Francisco-San Mateo-Redwood City, California (8.5% of the pool). When forecasted over a two-year horizon, the DBRS-projected CLTV at the B rating level equals 64.1%, representing sizable equity after base home price forecasts and MVD stresses. Borrower Credit The weighted-average FICO score of 777 indicates strong borrower credit profiles. Approximately 5.3% of the loans have FICOs lower than 720, and 23.5% have FICOs of 800 or higher. When underwriting the loans, the originators typically used the middle of three or lower of two scores. Borrower Income and Liquid Reserves For the entire pool, the (non-zero) weighted-average borrower income exceeds $402,000 annually. The weighted-average liquid reserve for the loans is approximately $258,000, which is enough to cover approximately five years of monthly mortgage payments. On average, 4.2% of the loans have liquid reserves higher than their current loan balance. Clean Payment Histories The pool is on average 11 months seasoned, with 209 loans aged over six months and a maximum age of 30 months. Although some loans are relatively seasoned, the payment histories on the loans are clean. No loan has had prior delinquencies since origination. Documentation Type Of the loans in CMLTI 2014-J1, 100.0% were underwritten to a full documentation standard. Approximately 93.5% of the loans were underwritten with 24 months or more of income verification (Income Level 5, according to the American Securitization Forum standard) and had full asset and employment verification as well. After reviewing the third-party due diligence results, DBRS considers all loans to have full documentation. While full documentation varies slightly among the originators, it generally consists of Two years of W-2 forms and paystub(s) with year-to-date earnings. Verification of employment. A signed and executed IRS 4506-T form. Verification of deposit or two months of bank statements for closing funds and reserves. In addition, the borrowers are expected to have been current on their prior mortgage (or rental) payments for at least 24 months. Self-Employed Borrowers Approximately 38.0% of the loans are to self-employed borrowers, which were analyzed separately by DBRS. Compared with the salaried borrowers in the pool, the self-employed borrowers have higher income and reserves. As confirmed by third-party due diligence, when underwriting the self-employed loans, all loans had at least two years of personal or business tax returns from either a borrower or a co-borrower. Certified Public Accountant certifications were provided by approximately 86.4% of the self-employed borrowers. 7 Presale Report Structured Finance: U.S. RMBS

8 Product Type The collateral pool consists of 100.0% first lien fixed-rate mortgages generally with an original term to maturity of 15 or 30 years. None of the loans have interest-only features. Fully amortizing fixed-rate loans generally pose the lowest default risk given the stability in monthly payments. Additionally, about 5.1% of the pool has amortization terms of 180 months (i.e., 15-year mortgages). These borrowers have historically exhibited better performance for their ability to assume higher monthly payments than their 30-year counterparts. Fast amortization also builds equity more rapidly, thus resulting in lower default risk. Occupancy (Percentage of Second Homes and Investment Properties) Approximately 0.5% and 0.9% of the loans are to finance second homes and investment properties, respectively. These loans represent slightly higher default risk (1.2x to 1.8x penalty) relative to owneroccupied loans. However, the liquid reserves for these borrowers are much higher, with reserves of $354,690 and $428,018, respectively. The second home and investment property borrowers have total annual incomes of $733,239 and $162,836, respectively. Geographic Concentration and Large Loans The CMLTI 2014-J1 pool has a relatively concentrated geographic composition, with California representing 55.4% of the pool and the top three states representing 68.2%. The average loan size of $764,863, while elevated, is not considered significant for a non-conforming pool, given that the maximum conforming loan limit for high cost areas is as high as $625,500 for single-family homes. DBRS measures concentration risk by a Herfindahl index calculated on both a geographic (MSA-level) and loan-size basis. The concentration measure, along with credit quality, derives the level of asset correlation, which is an important factor in the determination of rating category stresses. Compared with other recent DBRS-rated prime jumbo securitizations in the market, the asset correlation for this portfolio suggests a comparable level of concentration. Multiple Loans to a Single Borrower Approximately 47.7% of the borrowers have more than one mortgaged property. Borrowers with three or more mortgages (with a maximum of 17) represent 17.8% of the pool and generally show considerable income and liquid reserves. The weighted-average debt-to-income ratio for borrowers with multiple properties is 28.8%, slightly above the overall debt-to-income ratio for the entire pool of 28.2%. For borrowers with multiple mortgages, there are no instances where more than one of their mortgages have been included in this securitization. Key Loss Severity Drivers DBRS calculates loss severity as follows: (1) A recovery value is estimated from the statistical recovery model. In order to derive a recovery value, DBRS first estimates an updated property value at liquidation, which includes the following considerations: The number of months each subject loan takes to migrate through the delinquency, foreclosure and real estate owned (REO) timeline. MSA-level base home price forecast. MVD stress by rating category. Distressed sale discount of 30.8%. Further adjustment based on borrower and property characteristics. 8 Presale Report Structured Finance: U.S. RMBS

9 (2) Interest advancing (through liquidation) is subtracted from the recovery. (3) Loss is calculated as the shortfall of recovery to loan balance outstanding. Base Home Price Forecast (MSA Level) DBRS developed its own home price forecast model to estimate the expected level of house prices, as well as their distribution, which can then be used to predict future MVDs. Using the series level Case-Shiller index, the real home prices are calculated as the ratio of the house price index to the consumer price index (CPI; January 2002 = 100). The model separates real house price movements into two components the direction of the movement and its magnitude. The direction of the movement is modeled using logistic regression. The factors in the model are (1) the real house price index, (2) an indicator that the series is volatile and (3) whether the series is currently in an overheated state. The magnitude of the quarterly movement is modeled as a Weibull distribution with a mean that matches the mean of the series. MVD (by Rating Level) DBRS applies an MVD to all property values, ranging from 27% in the AAA scenario to 4% in the B scenario, and to all rating levels. Distressed Sale Discount DBRS applies a 30.8% haircut to the updated property values. This haircut is meant to address property sales in a liquidation scenario, which often represent distressed sales and therefore beaten-down prices. The value, one of the terms of the recovery model, has been estimated from past liquidations. In addition, the haircut also includes liquidation costs such as maintenance, repairs, attorney and real estate agent fees, etc. Further Property Value Adjustment (Generally Negative) Once the distressed sale discount is applied, further value adjustments, calculated based on the updated property value, are made based on the following characteristics. These adjustments are generally negative: Expensive and inexpensive properties Months in REO Property type Occupancy FICO Months since loan origination Property state These adjustments are made because each has a significant impact on the actual recovery percentage. Based on DBRS s analysis, each month in REO reduces the recovery amount by 1.8%. Expensive and inexpensive properties tend to recover less as a percentage of updated property value. Two property types are called out as different: manufactured homes and multi-unit, each of which produces lower recoveries, but neither exist in this pool. Investor homes and second homes have reduced recovery rates. Homes associated with higher-fico borrowers have improved recovery rates. Recovery declines with increased time since loan origination. Additionally, a handful of states (Ohio, Illinois, Pennsylvania and Michigan) had reduced recovery rates. Advancing (Calculated Based on the Note Rate at a State Level) The servicers are obligated to advance for principal and interest for delinquent mortgages as long as such advances are deemed recoverable. If the servicers fail in their obligations to advance, the master servicer will be obligated to fund such servicing advances. 9 Presale Report Structured Finance: U.S. RMBS

10 Given the expected performance of a prime pool as well as the financial strength of the servicers and/or the master servicer, DBRS assumes that servicer advancing would occur and continue through liquidation. Interest advancing at the note rate is included in the loss severity calculation. In the B base-case scenario, the number of months interest that is advanced follows the DBRS-derived state-by-state timeline. For each rating level higher than B, two incremental months are added to the timeline of the previous rating category. Qualified Mortgage Treatment Certain mortgage loans (12.3% of the pool) had loan application dates on or after January 10, 2014, and are subject to the QM and ATR rules (the Rules) issued by the Bureau of Consumer Financial Protection (CFPB) as part of the Dodd-Frank Act. These loans are designated as QM Safe Harbor, which mitigates future litigation risk and provides a level of assurance that these loans are better insulated from claims and defenses by borrowers. DBRS assumes that a QM Safe Harbor borrower will not file an ATR claim and, consequently, does not apply any additional loan-level loss severity adjustments. A third-party due diligence firm confirmed the correct QM designation for these loans and reviewed them for compliance with the Rules. Aggregator, Originators and Historical Performance Review Aggregator: Citigroup Global Market Realty Corp. (Citi) Citi Jumbo Conduit Program (Citi Conduit) The loans were acquired by Citi through its Jumbo Conduit Program established in April All the loans in this portfolio were purchased either on a flow or bulk basis from various originators. DBRS conducted an aggregator review of the Citi Conduit operation in Citigroup Global Markets Realty Corp. is a subsidiary of Citigroup Inc., which is publicly rated by DBRS at A (low), Stable. Originator Review Process and Monitoring (flow) Citi launched its conduit in April 2011 and began acquiring mortgage loans from various lenders through established relationships. Citi requires each prospective seller to complete a seller questionnaire and performs an on-site review of each of the originators that includes the financial capability (including tangible net worth and historical repurchase activities), company background, senior management, business strategy, origination process, underwriting, technology and quality control. In addition, for each originator, an independent division within Citi conducts a Know Your Customer review. With each seller, Citi enters into a mortgage loan purchase agreement that specifies various contract terms, including the sale and transfer, administration and servicing (if applicable) of the mortgage loans, as well as representation and warranty provisions. As part of its monitoring process, Citi conducts an annual review of each of the originators in its conduit program. Loan Acquisition and Third-Party Due Diligence (flow) At loan acquisition, a third-party due diligence firm performs reviews on credit, compliance, data integrity and property valuation analysis. All due diligence reviews are conducted on a post-close pre-funding basis. With respect to property valuation, the originator sends appraisals directly to the third-party due diligence firm. An appraisal goes through several layers of valuation reviews if needed, including an enhanced desk review and field review if applicable. 10 Presale Report Structured Finance: U.S. RMBS

11 Credit and compliance due diligence generally encompass document inventory, guideline standards, data analysis and verification, credit risk evaluation, fraud check and compliance review. The diligence firm reunderwrites mortgage loans, independently calculates debt-to-income ratios and assets, verifies income, FICO sourcing and employment based on the relevant documents in the loan files, and authenticates occupancy status by using available fraud prevention tools. Third-party due diligence was performed on 100.0% of the Citi conduit loans. DBRS generally adjusts property valuations and other attributes as appropriate based on the due diligence results. Underwriting Criteria DBRS analyzed the following key areas of the underwriting guidelines provided by Citi. The seller guides generally conform to the following standard. (1) Income and employment verification For salaried borrower: Two years of W-2. A pay stub with year-to-date earnings or traditional written VOE. Verbal verification of employment required within ten calendar days. 4506T is required to be signed, executed and transcript document must be provided. For self-employed: Two years of personal tax returns. Two years of business tax returns. Verbal verification of employment required within ten calendar days. 4506T is required to be signed, executed and transcript document must be provided. (2) Asset verification Full verification of asset for closing funds and reserves, including the most recent two months bank statements. (3) Reserve requirement Minimum reserve of nine to 12 months of loan payments, depending on FICO score. (4) Credit report/score Credit reports/scores must be from within the last 90 days. The middle of three scores or lower of two scores is applied. The primary borrower s score is used. (5) Prior mortgage delinquency A borrower must be 0 x 30 days delinquent in the previous 12 months. Borrowers with prior bankruptcy, short sales or deed-in-lieu in the past five years are not allowed, and borrowers with a foreclosure in the past seven years are not allowed. (6) Appraisal Two appraisals are required for loans greater than $1 million and must include interior photos. Appraisals are only good for 90 days. (7) Maximum LTV, DTI, cash-out amount and minimum credit score The maximum LTV, DTI, cash-out amount and minimum credit score will vary by loan amount, property type, occupancy and purpose. (8) Tradelines A Borrower(s) credit profile must include a minimum of three active trade lines that have a 24- month history. (9) Subordinate financing New subordinate financing is not allowed. Historical Performance As of October 2013, Citi has purchased 778 mortgage loans through the conduit, and of these loans, eight or 1.0% by loan count have had early payment default (EPD) and have all been repurchased by the respective originators. Of the eight EPDs, four loans missed a payment because of servicing transfer errors, and three loans missed a payment because of servicer errors. For one loan, the borrower became 30 days delinquent in one month and subsequently paid the loan in full the following month. 11 Presale Report Structured Finance: U.S. RMBS

12 Since October 2013, Citi has issued the following two securitizations. While limited in history, the performance of CMLTI 2013-J1, as shown below, has been satisfactory to date. Historical Performance of Citi Conduit Securitizations CMLTI 2014-J1 CMLTI 2013-J1 Closing Date June 2014 Nov 2013 Loan Count at Issuance Outstanding Balance at Issuance $218MM $210MM Securitization Performance (as of May 25, 2014) Current N/A 100.0% 30-Day Delinquent N/A 0.0% 60+-Day Delinquent 4 N/A 0.0% Cumulative Realized Loss N/A 0.0% Originators Stearns Lending, Inc. Stearns Lending, Inc. (Stearns) is the originator of approximately 33.5% of the loans in this transaction. DBRS performed an on-site review of Stearns and determined that it is an acceptable mortgage loan originator. Founded in 1989, Stearns is a private, independent mortgage origination company based in Santa Ana, California. The company employs over 1,485 full-time equivalents and maintains acceptable turnover rates of approximately 12%. In 2013, Stearns completed approximately $13 billion worth of loan funding and is on track to originate approximately $15 billion of production in The company maintains an integrated technology platform to support its growth initiatives, including a proprietary web-based communications portal for broker interface enabling registration of the application of new loans as well as rate, fee and lock communication between brokers and Stearns. Throughout 2013, Stearns continued to enhance the depth of its senior leadership and currently maintains an experienced senior management team that averages over 26 years of industry expertise. The company employs a staff of 224 underwriters who maintain a minimum of five years industry experience. All underwriters are located in 12 regional operations centers and four fulfillment centers separate from the company s sales force. Centralized groups in the corporate headquarters perform underwriting of special loan products such as jumbo loans and 203k loans. The underwriters of this group maintain an average of 19 years industry experience. Stearns originates mortgage loans through wholesale, retail, financial institutions and correspondent channels. As of March 31, 2014, the company s originations were sourced 69% through wholesale, 15% through retail, 14% through correspondent and 2% through financial institutions channels. For the same period, the product mix included 73% conventional, 16% FHA, 8% VA and 2% each USDA/RHS and 1% conventional jumbo product. The company follows investors and insurers underwriting guidelines with Stearns overlays that are more restrictive. Approximately 50% of appraisals are performed by a separate entity with the same ownership structure as Stearns that undergoes the same level of due diligence and ongoing review as all other independent third-party appraiser firms utilized by the company. 4. This bucket includes 60-day and more serious delinquencies, loans in foreclosure, bankruptcy as well as REO properties. 12 Presale Report Structured Finance: U.S. RMBS

13 Stearns quality control (QC) reviews are performed both by in house QC staff as well as by an independent third party on a random sample of loans that is selected by the vendor. As well, Stearns maintains an internal audit function reporting to the company s Board of Directors. Management has indicated that there were no material audit findings or litigation in the past 12 months that would affect their ability to originate mortgage loans. Nationstar Mortgage LLC Nationstar Mortgage LLC (Nationstar) is the originator of approximately 30.3% of the loans in this transaction. DBRS performed an on-site review of Nationstar and determined that it is an acceptable mortgage loan originator. Headquartered in Lewisville, Texas, Nationstar is a real estate services company engaged primarily in the origination and servicing of residential mortgage loans. As of Q1 2014, Nationstar s originations totaled over $4.7 billion. Nationstar originated over $24 billion of annual production as of December 31, 2013, up significantly compared with $7.9 billion in 2012 and $3.4 billion in In June 2013, Nationstar completed its acquisition of the origination platform and unfunded pipeline of Greenlight Financial Services (Greenlight), including Greenlight s reverse mortgage division. The company maintains an experienced management team that averages over 25 years of industry experience. Company tenure across the executive management team averages approximately four years; however, many senior executives have prior shared work experience. Nationstar employs approximately 1,600 full time equivalents (FTE) are dedicated to originations. The company has a knowledgeable underwriting staff of approximately 171 FTE who average nearly 10 years of industry experience. Additionally, the company utilizes offshore resources for strategically placed back-office originations functions. In December 2013, Nationstar completed the sale of its wholesale lending channel to Stonegate Mortgage Corporation. In 2014, Nationstar is focusing on its core consumer-direct channel. The company s retail channel sources prospective homebuyers through real-estate professionals, builders, financial planners and established borrowers. The company s jumbo prime product is sourced primarily through its retail channel in accordance with investor guidelines. Nationstar s correspondent channel focuses on delegated third-party originations with experienced lenders that underwrite and close loans in their own name. Nationstar performs a pre-purchase review on 100% of originations sourced through its correspondent channel. Nationstar uses independent third-party appraisal firms and maintains an appraisal review department staffed with six licensed appraisers. An appraisal review is performed on all loans greater than $415,000 and on any loan requested at the underwriter s discretion. Nationstar maintains a reliable control environment. The company s Chief Risk Officer reports directly to the Chief Executive Officer (CEO) and is responsible for providing risk oversight across Nationstar s origination and servicing platforms. The internal audit function reports directly to the company's Audit Committee. All functions with a high risk rating are audited every 18 months, areas rated medium are audited every two years and Low-rated areas are audited every three years. As well, the company maintains a separate QC department that performs periodic business practice reviews across the origination platform and a segregated quality control function that performs post-funding reviews on a statistically valid sampling of loans within days of closing. Freedom Mortgage Corporation Freedom Mortgage Corporation (FMC) is the originator of approximately 11.3% of the loans in this transaction. DBRS performed an on-site operational risk review of FMC and determined that it is an acceptable mortgage loan originator. FMC is a privately held independent mortgage company that was founded in Stanley Middleman is the sole stockholder and CEO of the company, which is headquartered in Mount Laurel, New Jersey. FMC 13 Presale Report Structured Finance: U.S. RMBS

14 employs almost 2,000 staff and originates residential mortgage loans in all 50 states and the District of Columbia. The company has been a Fannie Mae-approved seller since 1993 and a Ginnie Mae-approved issuer since The company maintains a stable and experienced leadership team that averages over 25 years of industry experience. The company also employs a knowledgeable underwriting staff of 175 FTE averaging ten years of industry experience. In 2013, FMC originated $15 billion of primarily conventional, FHA and VA mortgage loans and anticipates that it will originate approximately the same loan volume in FMC sources its originations predominantly through its retail, correspondent and wholesale channels. The company underwrites to FNMA, Ginnie Mae and their investor guidelines. Additionally, in certain circumstances the company utilizes credit policy overlays that are more restrictive than the agencies and investors underwriting criteria. All loans are underwritten in-house and there are no exceptions allowed to the respective agency or investor underwriting criteria. The company uses independent third party appraisal management firms and requires that all non-conforming jumbo products have full appraisals and an enhanced desk review. Additionally, FMC requires two full appraisals and an enhanced desk review for all jumbo transactions over $1 million in loan amount. FMC maintains a reliable system of controls and utilizes separation of duties in many of its processes to prevent fraud and errors. QC reviews are performed pre- and post-close on a random and targeted sample of loans. FMC follows agency requirements and as requested by investors to ensure there are no discrepancies in data. FMC also supports a comprehensive regulatory compliance program with an internal compliance department that is independent of the business units. Additionally, management has indicated that, in the past 12 months, there have been no material audit findings or litigation that would affect the firm s ability to originate mortgage loans. Servicers and Trust Administrator Servicers Nationstar Mortgage LLC Nationstar Mortgage LLC (Nationstar) is the servicer of 71.1% of the loans in this transaction. DBRS performed an on-site review of Nationstar s servicing platform and determined that it is an acceptable mortgage loan servicer. Headquartered in Lewisville, Texas, Nationstar is a residential mortgage loan servicer and originator. In March 2012, Nationstar s parent, Nationstar Mortgage Holdings Inc. completed an initial public offering and related reorganization transactions pursuant to which all of the equity interests in Nationstar were transferred from Fortress Private Equity Funds III and IV to two direct, wholly owned subsidiaries of Nationstar Mortgage Holdings, Inc. Following the initial public offering, Fortress owns approximately 78.5% of the company s common stock. As of March 31, 2014, Nationstar serviced a portfolio of over 1.9 million loans with an aggregate unpaid principal balance of $331.3 billion. Since July of 2011, Nationstar has been aggressively acquiring mortgage servicing rights (MSR) and subservicing rights to grow its portfolio and has more than doubled its portfolio over the last year. On March 5, 2014, Nationstar received an inquiry from Benjamin Lawsky, Superintendent of the New York Department of Financial Services. The letter inquires about Nationstar s servicing portfolio growth and mortgage servicing practices in The letter further requests that Nationstar provide the department with information regarding the servicing portfolio, staffing levels, business processes, vendors, 2013 MSR acquisitions and borrower letters. 14 Presale Report Structured Finance: U.S. RMBS

15 Nationstar operates its servicing platform from its headquarters as well as additional offices located in Indianapolis, Indiana; Scottsbluff, Nebraska; Denver, Colorado; Houston, Texas; and Chandler, Arizona. The company has a seasoned management team averaging over 22 years of industry experience. As of March 31, 2014, the servicing platform employed approximately 3,993 FTE, down from 5,600 FTE reported as of June The company states that most of the reduction is a result of increased productivity per employee and economies of scale in the servicing segment. Nationstar maintains a reliable control environment and has a Compliance Department staffed with 47 FTE in addition to a separate Legal Department. The internal audit function reports directly to the company's Audit Committee. All functions with a high risk rating are audited every 18 months, areas rated medium are audited every two years and Low-rated areas are audited every three years. As well, the company maintains a separate QC department that performs periodic process reviews across the servicing platform. In an effort to provide additional oversight to address the servicing platform s rapid growth, the QC department also validates all servicing process maps on a monthly basis. Nationstar utilizes a suite of proprietary models across its collection and loss mitigation efforts. The models are used to focus file penetration and calling efforts on high risk loans while allowing lower risk accounts to self-cure throughout the month. Once the borrower s account becomes days past due, Nationstar initiates calling efforts until contact is established. Calls continue until a right party contact has been made and a promise to pay or payment is received, or a reasonable resolution has been negotiated. At 60 days past due, loans are assigned a specific single point of contact and are placed in manual dialing campaigns. The single point of contact is responsible for the workout follow-up and all collection efforts until the delinquency is resolved or foreclosure has been completed. Nationstar reports right party contact rates of 24.5% and maintains solid call metrics for hold times and abandonment rates of 46 seconds and 2.6% respectively, up from seven seconds and 2.2% reported at the prior period. Based upon a borrower s capacity and desire to stay in the home, Nationstar will attempt a modification based on specific investor requirements. The company s modification waterfall usually follows HAMP (Home Affordable Modification Program) then proprietary modifications starting with capitalization modifications and then rate/term modifications. Nationstar allows for multiple modifications but looks to cap the number of modifications to three for the life of the loan. Nationstar reports a modification stick rate of approximately 82 % over the past thirteen months Fay Servicing, LLC Fay Servicing, LLC (Fay) is the servicer of 23.0% of the loans in this transaction. DBRS performed an on-site review of Fay s servicing platform and determined that it is an acceptable mortgage loan servicer. Headquartered in Chicago, Illinois, Fay is a residential mortgage loan servicer. Organized in 2007, Fay Servicing, LLC is a subsidiary of Fay Financial, LLC. Almost 100% of the assets on Fay s platform are managed for third parties. At the end of 2013, Fay had over 15 clients, including hedge funds, private equity funds, investment banks and insurance companies with almost 17,000 assets totaling approximately $3.8 billion of unpaid principal balance. Fay operates the servicing platform from its headquarters as well as from additional offices located in Oakbrook, Illinois, and Dallas, Texas. To provide additional capacity for growth, the company has added a new servicing site in Schaumburg, Illinois, which will be active in Q The company has a seasoned management team averaging nearly 17 years of industry experience. As of December 31, 2013, Fay employed 211 FTE with minimal staff turnover rates of 5%. Fay has a two-week training program for new servicing hires that covers a review of all regulatory, compliance, operational policies and procedures, and mock collection calls. Most new hires are 15 Presale Report Structured Finance: U.S. RMBS

16 experienced mortgage professionals and class sizes are typically small. As well, all staff must take regulatory compliance training courses through AllRegs. Fay supports an adequate control environment. Fay currently outsources the internal audit function to a third-party auditor who identifies internal audit requirements and performs the audits going forward. Fay also maintains a Compliance Committee composed of all functional managers, who meet monthly to discuss compliance issues and regulatory updates. The Company utilizes AllRegs as its regulatory change notification source. All changes that affect the operations are reviewed by in-house counsel, compliance and when necessary, outside counsel. All required business process changes are reviewed by both legal and compliance prior to implementation. As of December 31, 2013, management reports right-party contact rates within three months of boarding at 86.2%. Policies regarding modifications, forbearances and deferrals are highly dependent on client preference. Fay s standard model is to use Trial Payment Plans on each loan for six months to validate a customer s intent to pay. Modifications are completed after the trial has been successful. Deferrals are used for one-time customer issues. Recidivism has been at 12.3% on permanent modifications. While Fay has acceptable servicing procedures that comply with industry standards, typically the client dictates the default management instructions, including how to handle REO. Fay maintains an integrated technology platform. The company maintains an industry standard technology platform with no growth capacity issues. As well, the company utilizes integrated scoring models and financial analysis tools to adequately determine affordability and formulate customized resolutions and workout strategies for each borrower. Fay s website is available 24/7 and provides borrowers the ability to make electronic payments. Fifth Third Bank Fifth Third is the servicer of approximately 3.2% of the loans in this transaction. In April 2013, DBRS performed a telephone review of Fifth Third and believes that the company is an acceptable mortgage loan servicer. Fifth Third Mortgage Company services approximately 549,000 single-family residential loans totaling $79.8 billion. The servicing is predominantly FNMA and FHLMC product done primarily out of its platform in Madisonville, Ohio, with vendor employees in Manila in the Philippines, and Mexico for early stage delinquencies. The company employs a tenured servicing staff of approximately 660 FTE who average nearly five years with the company. Fifth Third utilizes proprietary scoring analysis to the development of its calling campaigns and approach to collection efforts. Collection strategies, which include early, mid- and late-stage teams, focus on properly resolving a borrower s short-term or long-term issue, with an eye on reducing roll-rates, delinquency and losses, with a strong focus on regulatory and compliance, and oversight. Calling strategies begin as early as three days past due and include a combination of auto dialer calls, manual calls, outreach letters and door knock representatives who visit homes personally. These efforts continue through default. Loss mitigation tools include Forbearance Plans, Repayment Plans and Modifications. When all of the options above fail, the company utilizes Deed-in-Lieu, Short Sale and Cash for Keys to avoid foreclosure. The workout eligibility analysis considers both hardship and a borrower s capacity first, with the hope that they can offer a retention option. If Fifth Third determines that maintaining ownership is not an option, it considers disposition with a focus on maximizing net proceeds and reducing its loss exposure. Deficiency notes are negotiated and obtained whenever possible. Once a loan has been foreclosed, the company immediately works to secure the property and assign it to an asset management firm. Currently, Fifth Third has approximately 730 REO assets in its portfolio totaling $116.4 million. 16 Presale Report Structured Finance: U.S. RMBS

17 PennyMac Corp. PennyMac Corp. (PennyMac) is the servicer of 2.8% of the loans in this transaction. DBRS performed an on-site operational risk review of PennyMac s servicing platform and determined that it is an acceptable mortgage loan servicer. Founded in 2008, PennyMac is a national mortgage lender and servicer, and is a wholly owned subsidiary of PennyMac Financial Services, Inc. (PFSI). On May 9, 2013, PFSI was listed on the New York Stock Exchange. PFSI employs nearly 1,400 staff and PennyMac is an FNMA-, FHLMC-, HUD/FHA-, VA- and GNMA-approved seller servicer. As of July 31, 2013, PennyMac serviced a portfolio of over 203,000 loans with an unpaid principal balance of over $47 billion, of which 51% represented GSE servicing, 38% Ginnie Mae servicing, 7% distressed whole loan servicing and 4% non-agency securities by loan volume. The centralized servicing platform is located in Moorpark, California. The company employs an experienced executive management team with over 26 years of mortgage and finance experience, many with shared work experience at previous companies. Additionally, group managers have nearly 18 years of industry experience. PennyMac maintains a staffing model tied to production volumes and currently has a servicing staff of 345 FTE as of July The company s turnover rates for servicing staff were 18.32% as of year-end PennyMac has 11 training FTE responsible for the development of training materials in conjunction with the leadership team and the P&P team. Each department is responsible for the department-level training. Call center new hires receive three weeks of classroom training followed up with four weeks of on-the-job training to re-enforce class room instruction. PennyMac has a reliable system of internal controls and maintains both Internal Audit (IA) and QC functions. IA reports administratively to the Chief Governance Officer and with respect to work content and performance to the company s Audit Committee and Board of Directors. IA utilizes a risk-tiered audit model to provide resources to higher risk, new or complex processes. IA performs annual Sarbanes-Oxley assessments, works with independent auditors on SSAE 16 to ensure quality testing of key internal controls, and works with auditors on USAP examinations for compliance with servicing standards. As well, IA performs regular investigations of business unit practices and procedures to ensure appropriate controls are in place. QC reports to the Chief Credit and Enterprise Risk Officer independent from the business units. QC tests and reports key operational measures within the business units through metrics/performance indicators that reflect the strengths and weaknesses of the business unit and its progress toward the company s goals and standards. Regulatory Compliance is managed through the Compliance Committee chaired by the Chief Compliance Officer. The committee ensures communication of new and amended laws and regulations along with the implementation of compliance controls and policy and procedure updates. The committee also monitors compliance risk via performance metrics. Management has indicated that there are no class action or other litigation matters that would present any material risk to PLS. PennyMac maintains a strong IT infrastructure with its main servicing system being MSP. In addition, the company uses many ancillary systems in support of its servicing efforts, including a robust data warehouse, a default decisioning mode, and an on-line REO management portal. PennyMac has acceptable loan administration capabilities. Correspondent lending and acquisition portfolios are electronically boarded while the loans originated through the company s retail channel are manually boarded. Individual loan audits are conducted to ensure accurate boarding to the servicing system. As well, the company performs a document-to-system review of a sampling of 25 loans on a weekly basis. The company has effective cash management processes. Over 95% of payments are received via lockbox and electronic payment methods. All bank accounts are reconciled monthly and all aged reconciling items 17 Presale Report Structured Finance: U.S. RMBS

18 are cleared within 30 days. Exception and suspense processing is worked daily, and weekly management monitoring is in place to ensure items are cleared in a timely fashion. Tax and insurance tracking are performed by on-shore vendors for both escrowed and non-escrowed loans. PennyMac staff perform all escrow analysis and monitor vendor performance to ensure regulatory compliance and adherence to established service levels. The company has negligible tax penalties relative to the size of its portfolio; however, during the last 12 months, one property was lost due to non-payment of taxes. PennyMac maintains a focused approach to default management. Depending on risk score, loans enter collections as early as one day past due with weekly attempts ranging from one to five attempts based on risk score and delinquency bucket. Monthly dialing strategies are created and published five days prior to the beginning of the month. Key loan characteristics are taken into consideration for prioritizing call strategies including, but not limited to, delinquency bucket, Early Indicator Score, FICO bands, payment history, contact rates, and product types. The Home Retention Department is responsible for processing, underwriting, validating and closing loan modifications. PennyMac utilizes a default decisioning tool to determine the best borrower work out option. All government required modification waterfall options are followed with efforts focused on keeping borrowers in the home. HAMP and government-sponsored programs as well as PennyMac proprietary programs are offered. The company requires full documentation for all modifications. Underwriters proactively contact borrowers to make trial payments and educate borrowers on staying current. The company reports that 94-98% of trial modifications convert to permanent modifications. Prior to initiating foreclosure, all loans undergo an extensive foreclosure review that is integrated into the servicing system, which reviews modification, denials, bankruptcy activity and collection activity. No loans are auto approved. There is an authority matrix used in the foreclosure referral process. All loans are electronically referred to attorneys through the servicing system for timeline tracking. As of July 2013, PennyMac managed 1,129 REO assets. PennyMac uses an on-line REO management portal to manage its REO platform. The portal provides access to real time data, corresponds with vendors and manages all REO-related activities and timelines. Pricing strategy is looked at on a state-specific basis, but generally the company reports that it lists at 105%. List prices are looked at monthly and price reductions are determined individually on a case-by-case basis. PennyMac does not employ the use of a rental strategy for REO. However, the company uses auctions for low-value (<$50K) properties at days on market with no offers. In 2012, the company sold $306 million of REO assets at 105% of value at the time of contract. Trust Administrator Deutsche Bank National Trust Company (DBNTC) will act as the Trust Administrator and Custodian for CMLTI 2014-J1. As the Trust Administrator, DBNTC is responsible for the aggregation of monthly servicer reports and remittances. Upon the occurrence of certain servicer events of default under the terms of the servicing agreements, the Trust Administrator may be required to enforce certain remedies on behalf of the issuing entity against such defaulting servicer. In particular, if the applicable servicer fails its obligation to make advances, DBNTC will be obligated to fund such servicing advances and may be directed to terminate the defaulting servicer. DBNTC is also responsible for the administration of the issuing entity, which includes pool performance calculations, distribution calculations and the preparation of monthly distribution reports. As Trust Administrator, DBNTC is responsible for the preparation and filing of all Real Estate Mortgage Investment Conduit (REMIC) tax returns on behalf of the issuing entity. 18 Presale Report Structured Finance: U.S. RMBS

19 As the Trust Administrator, DBNTC will perform, on behalf of the Trustee, the duties of authenticating agent, paying agent, collateral reporting agent and certificate registrar. Transaction Structure Transaction Diagram Originators Stearns Lending, Inc. Nationstar Mortgage LLC Freedom Mortgage Corporation Chicago Mortgage Solutions Other Originators Sponsor Citigroup Global Markets Realty Corp. Trustee Wilmington Savings Fund Society, FSB, d/b/a Christiana Trust Servicers Nationstar Mortgage Fay Servicing Fifth Third Bank PennyMac Corp. Trust Administrator Deutsche Bank National Trust Company Depositor Citigroup Mortgage Loan Trust Inc. Issuing Entity CMLTI 2014-J1 Class A Certificates (Senior Certificates) Class B Certificates (Subordinate Certificates) Cash Flow Structure and Features Available Distribution Amount For each related distribution period, the available distribution amount is the sum of (1) Scheduled interest (net of aggregate expense fees) and principal payments. (2) Servicer advances of interest and principal on delinquent loans. (3) Full and partial prepayments of principal and prepayment interest shortfalls. (4) Insurance proceeds and net liquidation proceeds. (5) Any other recoveries of funds and repurchase and substitution amounts. minus: (1) Advances and other amounts for which the servicers and Trust Administrator are entitled to be reimbursed. (2) Related trust expenses not already paid. (3) Amounts payable to a responsible party representing collections received on any loan or REO property after a repurchase by the responsible party. (4) Amounts deposited to the distribution account in error. Related trust expenses not already paid include (a) capped extraordinary trust expenses (up to $220,000 annually) and (b) uncapped trust expenses. The uncapped trust expenses relate to the enforcement for breaches of representations and warranties, action against a governmental authority with respect to eminent domain, servicing transfer costs and other expenses of the servicers to which they are entitled to reimbursement by the Trust. When running cash flows for this transaction, DBRS incorporated the capped extraordinary trust expenses (discussed later in the cash flow analysis section) but applied no additional stresses with respect to the uncapped expenses. 19 Presale Report Structured Finance: U.S. RMBS

20 Priority of Payments On each distribution date, the available distribution amount will be applied in the following order of priority: (1) Pay the current and unpaid interest to the Class A-1, Class A-1-IO, Class A-2 and Class A-2-IO Certificates, pro rata. (2) Pay the scheduled principal and the allocated share of unscheduled principal payments (senior principal distribution amount) pro rata to the Class A-1 and Class A-2 Certificates in accordance with the senior prepayment percentages set forth in the table below. (3) Sequentially to Classes B-1, B-2, B-3, B-4 and Class B-5 Certificates, the current and unpaid interest and then each class s pro rata share of principal payments (IPIP). The principal payments to the Class B Certificates consist of the scheduled principal and their allocated share of the unscheduled principal payments subject to certain performance tests as described below in Step-Down Test. (4) To the Class LT-R and Class R Certificates, any remaining amounts. To the extent any of the exchange certificates above are exchanged for a proportionate share of the exchangeable certificates, such exchangeable certificates will be paid in the same priority as the exchange certificates described above. Senior Prepayment Percentage Distribution Date Occurring in the Period Senior Prepayment Percentage Prior to July % July 2019 to June 2020 the Senior % plus 70% of the Subordinate % July 2020 to June 2021 the Senior % plus 60% of the Subordinate % July 2021 to June 2022 the Senior % plus 40% of the Subordinate % July 2022 to June 2023 the Senior % plus 20% of the Subordinate % July 2023 and thereafter the Senior % Step-Down Test The step-down test consists of a delinquency and a cumulative loss component. Upon the satisfaction of the two tests (or triggers), the subordinate classes may receive their allocated share of prepayments. The tests are as follows: Delinquency Test: The outstanding principal balance of all loans delinquent 60+ days or more (including loans in foreclosure, REO or bankruptcy status, as well as any mortgages subject to a servicing modification in the prior 12 months), averaged over the preceding six months, as a percentage of the aggregate then-current principal balance of the subordinate classes, does not equal or exceed 50%. Cumulative Loss Test Distribution Date Occurring in the Period Cumulative Realized Losses as a % of the Original Aggregate Subordinate Class Principal Amounts July 2019 to June % July 2020 to June % July 2021 to June % July 2022 to June % June 2023 and thereafter 40% Applicable Credit Support Percentage The structure locks subordinate classes out of principal distributions if the then-current credit support percentage (defined as (1) the sum of the current balance of a respective subordinate class and all classes subordinate to it divided by (2) the total then-current collateral balance) falls below the applicable credit 20 Presale Report Structured Finance: U.S. RMBS

21 support percentage as indicated in the table below. In such instances, these principal distributions will be redirected to the more senior classes to accelerate their paydowns. Applicable Credit Support Percentage Class Applicable Credit Support Percentage B % B % B % B % B % Subordination Floor The transaction benefits from a subordination floor of 2.00% of the collateral principal balance at issuance. This prevents a certain level of credit support from leaking out of the capital structure even when the transaction is performing within expectations (i.e., the subordinate classes are receiving unscheduled principal). Such subordination floor also provides protection against tail risk when the pool reduces to a small loan count. Allocation of Realized Losses Realized losses will first be allocated in a reverse sequential order from the most subordinate class and up (Class B-5, Class B-4, Class B-3, Class B-2 and Class B-1, in that order), until the principal balance of each class is reduced to zero. Second, losses will be applied to Class A-2 until reduced to zero. Third, losses will be applied to Class A-1 until reduced to zero. Cash Flow Analysis DBRS generally undertakes a detailed structural analysis that encompasses 40 cash flow scenarios. The cash flow modeling assumptions focus on the following risk factors: (1) Prepayment speeds (2) Timing of losses (3) Interest rate stresses (when there is a mismatch between collateral and bond coupons) DBRS incorporates a dynamic cash flow analysis in its rating process. As indicated in the table below, a baseline of five prepayment scenarios (under two Intex conventions Standard and Max 5 ) and two loss timing curves were applied to test the resilience of the rated classes. No interest rate stresses were run for this pool as the mortgages are fixed rate and the bonds bear coupons subject to the weighted-average of the net mortgage rates (Net WAC). Therefore, DBRS ran a total of 20 cash flow scenarios for this transaction. A 60+ days delinquency curve was approximated based on the collateral attributes of the pool. Coupled with the losses derived from the RMBS Insight model, DBRS tested both the delinquency and cumulative loss triggers as part of the step-down test. 20 Cash Flow Scenarios Applied by DBRS for CMLTI 2014-J1 DBRS Cash Flow Scenario Prepayments Intex Prepayment Convention Loss Timing 1-5 5% 25% CPR Standard Front-loaded % 25% CPR Standard Back-loaded % 25% CPR Max Front-loaded % 25% CPR Max Back-loaded 21 Presale Report Structured Finance: U.S. RMBS 5. Standard: The standard prepayment rate consists of voluntary prepayments only. Prepayment amount and default amount are applied to the loans independently. Max: Intex will first apply the defaulted amount, then apply the prepayment amount such that the total amount applied is equal to the larger of the prepayment or the default amount.

22 In a shifting interest structure, the bonds typically need additional subordination relative to expected losses, particularly in a back-loaded loss timing environment. As scheduled principals are distributed to the subordinate classes from deal inception, credit support for the more senior classes gradually leak out from the capital structure. The later the losses occur, the lower the level of credit support that remains to cover such losses. As a result, the proposed structure typically warrants higher credit enhancement by approximately 0.25% to 1.00% (from the lowest to the highest ratings levels) to cover losses at the respective ratings. For this transaction, extraordinary trust expenses up to $220,000 annually may be paid from available funds before any distribution to the securities, thus potentially reducing the interest and principal available to the certificate holders. DBRS ran additional cash flow stresses aligned with the duration of the DBRS loss timing curves to capture these potential expenses and ensure that the rated bonds can withstand further cash flow stresses. As a result, the proposed structure warranted higher credit enhancement. DBRS s ratings do not address the likelihood that there may be interest shortfalls as a result of the occurrence of extraordinary trust expenses in any given month. Rating Category Analysis DBRS employs various home price assumptions in its credit analysis at each rating category. Although an important driver of defaults and loss severities, home prices alone do not necessarily warrant rating changes. Many other factors, including economic measures and prepayment behaviors, can also cause changes in transaction performance. Higher rating levels by design have the ability to withstand increasing stresses more than the lower rating levels. Rating Category Stresses DBRS incorporates home prices, asset correlation and simulation in determining rating category stresses. Associated with each rating category is a home price or MVD scenario. All future house values are adjusted downward by this percentage. The adjustment is applied in addition to (1) the base house price forecast scenario, (2) the distressed sale discount and (3) further property value haircuts by property and loan characteristics as described in the Key Loss Severity Drivers section. The table below illustrates the key home price decline assumptions for each rating category. Home Price Decline Assumptions by Rating Category Rating Category Base House Price Forecast * Base Home Price Decline Distressed Sale Discount Total Home Price Decline AAA 2% -27% -31% 48% AA 2% -23% -31% 46% A 2% -17% -31% 41% BBB 2% -13% -31% 39% BB 2% -7% -31% 34% B 2% -4% -31% 32% * Further market value haircuts by property and loan characteristics are not included in this example. The example uses a 2% base house price forecast, which represents the DBRS national forecast. % Actual forecasts vary by MSA and are estimated by the DBRS house price forecast model as described in the Key Loss Severity Drivers section. Asset correlation is determined by the level of concentration (in geography and loan size) and credit quality. A simulation approach is utilized to determine the portfolio-level distribution of default and recovery. Simulations are run until the probability of exceeding the estimated rating stress level is less than a target value, or confidence interval, as established by the DBRS idealized default table. 22 Presale Report Structured Finance: U.S. RMBS

23 Third-Party Due Diligence JCIII and Associates, Inc., LenderLive Network Inc., Opus Capital Markets Consultants, LLC and Stewart Lender Services (together, the TPR Firms) performed the third-party due diligence review for this transaction. DBRS has conducted on-site reviews of the TPR Firms and believes that the companies have adequate staffing, infrastructure and capabilities to effectively perform residential mortgage due diligence reviews. For this transaction, 100% of the final pool was reviewed for credit and compliance. In addition, all but 17 loans were reviewed for original property valuation. With respect to the 17 mortgage loans, the Sponsor obtained an updated valuation of the related mortgaged property. Data integrity checks were also performed on the pool. Due to the relatively low seasoning of the loans, pay history reviews were not performed on the pool. The scope of the due diligence review included: (1) Regulatory compliance The compliance review included testing for certain Federal, State and Local regulatory compliance conditions. (2) Credit The detailed credit review included a comparison of various documentation in the loan files to the origination guidelines. The TPR Firms recalculated various ratios, including DTI, LTV and CLTV and compared them against the origination guidelines. Asset statements were reviewed to assess whether required funds and reserves to close the loan were documented and were within the origination guidelines. The TPR Firms verified and confirmed that FICO and credit histories were within the origination guidelines. The loan files were evaluated for evidence of borrower s willingness and ability to repay the obligation and reviewed for reasonability of income, employment, assets and occupancy status. (3) Valuation Review The review included making a reasonable assessment of whether the appraisal was thorough and complete, and the appraised value appeared to be supported. (4) ATR and QM For loans designated as QM, the TPR Firms reviewed the applicable loans for compliance with the ATR and QM requirements based on the loan s designation. The TPR Firms performed an initial review and assigned grades for compliance, credit and valuation. Following the initial grading, additional information and supporting documentation may have been provided by the originators and the Sponsor to clear outstanding conditions. DBRS received a comprehensive loan-level analysis from the TPR Firms that includes initial grades, final grades and detailed commentary on the rationale for any changes in grades, including compensating factors and waivers. DBRS reviews due diligence results and generally makes adjustments to documentation types, property values, and hence loss rates on certain loans, as described in the relevant sections in this report. DBRS also indexed the property values using Case-Shiller home price indices on certain loans. For this transaction, the TPR Firms provided DBRS written attestations that generally include the following: (1) The diligence review was conducted without influences from the sponsor of the transaction. (2) The review was completed in accordance with DBRS third-party due diligence criteria. (3) The reviewers have the appropriate level of experience to complete the due diligence review. (4) Ample time was given to the firm to perform the review and report the findings to DBRS. 23 Presale Report Structured Finance: U.S. RMBS

24 Representations and Warranties Each originator has made certain representations and warranties concerning the mortgage loans. Such representations and warranties will be restated in the related Assignment, Assumption and Recognition Agreements (AAR) to and for the benefit of the Trust and the certificateholders either as of the Closing Date or a date prior to closing date. With respect to the latter, the Sponsor or the servicer will be covering the gap for the period between the restatement date (prior to closing date) and the Closing Date. In addition, the Sponsor will make limited representations and warranties as to its unencumbered ownership of the Mortgage Loans immediately prior to assignment to the Depositor. In addition, each of Nationstar and Fay has made certain loan-level and corporate representations and warranties with respect to certain Mortgage Loans serviced by it but sold to the Sponsor by an Originator other than Nationstar. Any breach of these representations and warranties by a Servicer will only result in the Servicer s being required to make an indemnification payment in an amount sufficient to reimburse the Trust for any loss in value of the mortgage loan that arose as a result of such breach. The representations and warranties provided for the transaction substantially conform to the DBRS Representations and Warranties Criteria for U.S. RMBS Transactions. Enforcement Mechanism Upon the occurrence of a trigger event (a loan becomes seriously delinquent or a loan incurs a loss), the Trust Administrator will notify the Originator and Sponsor and include a notice on the next distribution date statement. The Responsible Party (the applicable Originator or the Sponsor) may effect a remedy by curing any breach of representations and warranties, paying an amount equal to the realized loss of a liquidated loan, repurchasing the related mortgage loan or substituting a similar mortgage loan (Effective Remedy). If a remedy notice is not submitted during the Initial Period, the Trust Administrator shall engage a thirdparty (Qualified Reviewer) to review each such loan to determine if the Responsible Party is obligated to remedy the breach. If as the result of such review, there is evidence of a breach of a representation and warranty that meets the remedial conditions, the Responsible Party may complete an Effective Remedy or submit a dispute notice. If it is concluded that there is no breach, or if the Responsible Party submits a dispute notice, the loan will become eligible for arbitration. In accordance with the transaction documents, disputes are ultimately subject to determination made in a related arbitration proceeding. 24 Presale Report Structured Finance: U.S. RMBS

25 Standard Process for Review and Arbitration Trigger Event occurs Reported on 1st Distribution Date TA CH QR RP AA QA DP Trust Administrator Controlling Holder Qualified Reviewer Responsible Party Alternate Appointer Qualified Arbitrator Directing Party Initial Period Effective Remedy in Initial Period Y/N? Remedial Status Reported on 2nd Distribution Date Yes No Review Status Reported on 2nd Distribution Date TA can cease review process with permission from CH TA engages QR promptly Generally within 10 business days Two failed attempts to engage QR QR is engaged QR completes review & submits Final Review Determination to RP & TA Generally in 60 days from receipt of documents Review Period Breach meets remedial conditions No breach Remedial Status Yes: RP sends Remedy Notice RP completes Effective Remedy Y/N? No: RP sends Dispute Notice Arbitration Eligible Status Reported on the next distribution statement Arbitration Status Reported on the next distribution statement CH or AA submits Arbitration Request Notice Generally within 30 days Y/N? Yes: Identify three QA for TA to retain No No further action needed & RP has no obligation to remedy Arbitration Period RP, TA & DP will reasonably cooperate to engage three QA Within 10 business days post Arbitration Election Period Repeat process until three QA are engaged Final Review Determination: Upheld or Reversed Yes QA determines by majority vote if review was properly performed Y/N? No QA can revert loan back to Review Status Final Arbitration Determination will be final and binding 25 Presale Report Structured Finance: U.S. RMBS

26 Sponsor Backstop The representations and warranties from the originators remain in effect for the life of the transaction. The loans (other than those originated by Fifth Third Bank) benefit from representations and warranties back-stopped by Citi, a wholly owned subsidiary of Citigroup Inc., in the event of an originator s bankruptcy or insolvency proceeding, and if the originator fails to complete an Effective Remedy. However, such backstop is subject to sunset provisions as described below. Sunset Provisions The Sponsor backstop on two representations and warranties with respect to fraud and underwriting shall generally expire if notice of such breach is not given by 36 months after the Cut-off Date. However, these sunset provisions also give consideration to loan performance. The sunsets will occur on the later of (a) 36 months after the Cut-off Date if the borrower has made 36 scheduled payments and (b) 36 months after the delinquent loan is cured if the borrower has become 30 days or more delinquent. Other than the underwriting and fraud representations, the rest of the representations and warranties will remain in effect for the life of the transaction. DBRS Viewpoint DBRS reviewed the various aspects of the transaction representations, and in conjunction with a detailed analysis of (1) the quality of the underlying prime mortgage loans, (2) third-party due diligence sample size and results and (3) a financial assessment of the entities providing such representations and warranties, deems the representations and warranties standard for the CMLTI 2014-J1 transaction as acceptable. However, some originators may potentially experience financial stress that could result in their inability to fulfill repurchase obligations, and the sunset provisions on the backstop by Citi still demand additional penalties and credit enhancement protections. To capture this potential weakness, DBRS discounted the Sponsor backstop and adjusted downward the origination score of certain originators and hence increased the loss rates. DBRS based its analysis of the representations and warranties standard on the following factors: (1) Strong credit quality of the underlying prime mortgages. (2) The originators will provide standard lifetime representations and warranties with no sunset provisions. (3) Third-party due diligence was conducted on 100% of the pool with satisfactory results, which mitigates the risk of future representations and warranties violations. (4) Automatic reviews for breaches of representations are triggered on any loan that becomes more than 120 days delinquent or incurs a loss upon liquidation. (5) All disputes are ultimately subject to determination made in a related arbitration proceeding. In certain cases, DBRS generally assigns additional penalties and adjusts certain loan attributes based on third-party due diligence results to provide added cushion in its expected losses analysis. 26 Presale Report Structured Finance: U.S. RMBS

27 Rule 17g-7 Report The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link or by contacting us at In accordance with the operational risk framework outlined in the DBRS RMBS Insight model and rating methodology, the framework takes into consideration aspects of DBRS s originator and servicer assessment, the results of the third-party due diligence review and the strength of the representations and warranties provided, which may result in a credit or penalty applied to the default and loss severity rates of a mortgage pool. Methodologies Applied The following are the primary methodologies DBRS applied to assign a rating to the above-referenced transaction, which can be found on under the heading Methodologies. Alternatively, please contact [email protected], or contact the primary analysts whose information is listed in this report: RMBS Insight 1.2: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology Unified Interest Rate Model for U.S. RMBS Transactions Third-Party Due Diligence Criteria for U.S. RMBS Transactions Representations and Warranties Criteria for U.S. RMBS Transactions Legal Criteria for U.S. Structured Finance Transactions Monitoring and Surveillance The transaction will be monitored in accordance with the DBRS U.S. RMBS Surveillance Methodology. Note: All figures are in U.S. dollars unless otherwise noted. This report is based on information as of June 2014, unless otherwise noted. Subsequent information may result in material changes to the rating assigned herein and/or the contents of this report. Copyright 2014, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided as is and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or noninfringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS 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. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON 27 Presale Report Structured Finance: U.S. RMBS