Fitch Ratings expects to assign ratings and Rating Outlooks to Fannie Mae's risk transfer transaction, Connecticut Avenue Securities Trust, series 2021-R02 (CAS 2021-R02).

RATING ACTIONS

Entity / Debt

Rating

CAS 2021-R02

2A-H

LT

NR(EXP)sf

Expected Rating

2M-1

LT

BBB-(EXP)sf

Expected Rating

2M-1H

LT

NR(EXP)sf

Expected Rating

2M-2A

LT

BBB-(EXP)sf

Expected Rating

2M-AH

LT

NR(EXP)sf

Expected Rating

2M-2B

LT

BB+(EXP)sf

Expected Rating

2M-BH

LT

NR(EXP)sf

Expected Rating

2M-CH

LT

NR(EXP)sf

Expected Rating

2B-1A

LT

BB-(EXP)sf

Expected Rating

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

Fitch Ratings expects to rate the 2M-1, 2M-2A, 2M-2B, 2M-2C, 2M-2, 2B-1A, 2B-1B and 2B-1 notes and certain combinable notes on Fannie Mae's risk transfer transaction CAS 2021-R02. Fannie Mae is issuing a credit risk transfer transaction as a REMIC from a bankruptcy-remote trust. The notes are subject to the credit and principal payment risk of a pool of certain residential mortgage loans (reference pool) held in various Fannie Mae-guaranteed MBS.

KEY RATING DRIVERS

Updated Sustainable Home Prices (Negative): Due to Fitch's updated view on sustainable home prices, Fitch views the home price values of this pool as 12.7% above a long-term sustainable level (versus 11.7% on a national level). Underlying fundamentals are not keeping pace with the growth in prices, which is a result of a supply/demand imbalance driven by low inventory, low mortgage rates and new buyers entering the market. These trends have led to significant home price increases over the past year, with home prices rising 18.6% yoy nationally as of June 2021.

Strong Credit Quality (Positive): The reference mortgage loan pool consists of high-quality mortgage loans acquired by Fannie Mae between Oct. 1, 2020 and Dec. 31, 2020. The reference pool will consist of loans with loan-to-value (LTV) ratios greater than 80% and less than or equal to 97%. Overall, the reference pool's collateral characteristics reflect the strong credit profile of post-crisis mortgage originations. The loans are seasoned approximately 10 months in aggregate. The borrowers have a relatively strong credit profile (749 FICO and 36% DTI) with high leverage (92% sLTV).

Advantageous Payment Priority and Cash Flow Structure (Positive): Generally, principal will be allocated pro rata between the senior 2A-H tranche and the subordinated classes. If the minimum credit enhancement test and the delinquency test are both satisfied, total principal will be allocated pro-rata between the senior and subordinate tranches (paid sequentially within the subordinate tranches). Otherwise, if either the minimum credit enhancement test or delinquency test is not satisfied, 100% of the scheduled and unscheduled principal will be allocated to the senior tranche and then to the subordinate tranches.

The payment priority of the class 2M-1 notes will result in a shorter life and more stable CE than mezzanine classes in PL RMBS, providing a relative credit advantage. Unlike PL mezzanine RMBS, which often do not receive a full pro-rata share of the pool's unscheduled principal payment until year 10, the 2M-1 notes can receive a full pro-rata share of principal, as long as a minimum CE is met and the delinquency test is satisfied.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The defined negative rating sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10.0%, 20.0% and 30.0% in addition to the model projected 42.8% at 'AAA'. The analysis indicates that there is some potential rating migration with higher MVDs for all rated classes, compared with the model projection. Specifically, a 10% additional decline in home prices would lower all rated classes by one full category.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The defined positive rating sensitivity analysis demonstrates how the ratings would react to positive home price growth of 10% with no assumed overvaluation. Excluding the senior class, which is already rated 'AAAsf', the analysis indicates there is potential positive rating migration for all of the rated classes. Specifically, a 10% gain in home prices would result in a full category upgrade for the rated class excluding those being assigned ratings of 'AAAsf'.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering Documents for this market sector typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the trust. Therefore, Fitch credit reports for this market sector will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions'.

ESG Considerations

CAS 2021-R02 has an Social Relevance Score of '+4' for Human Rights, Community Relations, Access & Affordability due to as CAS is a GSE program that addresses access and affordability while driving strong performance, which has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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