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Fitch Expects to Rate Fannie Mae's Connecticut Ave Securities, Series 2017-C07; Presale Issued.

New York: Fitch Ratings expects to assign the following ratings and Rating Outlooks to Fannie Mae's risk transfer transaction, Connecticut Avenue Securities, series 2017-C07:

--$186,170,000 class 1M-1 notes 'BBB-sf'; Outlook Stable;

--$133,258,000 class 1M-2A notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1M-2B notes 'BB-sf'; Outlook Stable;

--$135,218,000 class 1M-2C notes 'Bsf'; Outlook Stable;

--$401,734,000 class 1M-2 exchangeable notes 'Bsf'; Outlook Stable;

--$133,258,000 class 1A-I1 exchangeable notional notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1E-A1 exchangeable notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1A-I2 exchangeable notional notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1E-A2 exchangeable notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1A-I3 exchangeable notional notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1E-A3 exchangeable notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1A-I4 exchangeable notional notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1E-A4 exchangeable notes 'BBsf'; Outlook Stable;

--$133,258,000 class 1B-I1 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1E-B1 exchangeable notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1B-I2 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1E-B2 exchangeable notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1B-I3 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1E-B3 exchangeable notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1B-I4 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$133,258,000 class 1E-B4 exchangeable notes 'BB-sf'; Outlook Stable;

--$135,218,000 class 1C-I1 exchangeable notional notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1E-C1 exchangeable notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1C-I2 exchangeable notional notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1E-C2 exchangeable notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1C-I3 exchangeable notional notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1E-C3 exchangeable notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1C-I4 exchangeable notional notes 'Bsf'; Outlook Stable;

--$135,218,000 class 1E-C4 exchangeable notes 'Bsf'; Outlook Stable;

--$266,516,000 class 1E-D1 exchangeable notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1E-D2 exchangeable notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1E-D3 exchangeable notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1E-D4 exchangeable notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1E-D5 exchangeable notes 'BB-sf'; Outlook Stable;

--$268,476,000 class 1E-F1 exchangeable notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1E-F2 exchangeable notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1E-F3 exchangeable notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1E-F4 exchangeable notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1E-F5 exchangeable notes 'Bsf'; Outlook Stable;

--$266,516,000 class 1-X1 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1-X2 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1-X3 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$266,516,000 class 1-X4 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$268,476,000 class 1-Y1 exchangeable notional notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1-Y2 exchangeable notional notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1-Y3 exchangeable notional notes 'Bsf'; Outlook Stable;

--$268,476,000 class 1-Y4 exchangeable notional notes 'Bsf'; Outlook Stable;

--$107,666,000 class 2M-1 notes 'BBB-sf'; Outlook Stable;

--$101,332,000 class 2M-2A notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2M-2B notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2M-2C notes 'Bsf'; Outlook Stable;

--$303,996,000 class 2M-2 exchangeable notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2A-I1 exchangeable notional notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2E-A1 exchangeable notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2A-I2 exchangeable notional notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2E-A2 exchangeable notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2A-I3 exchangeable notional notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2E-A3 exchangeable notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2A-I4 exchangeable notional notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2E-A4 exchangeable notes 'BBsf'; Outlook Stable;

--$101,332,000 class 2B-I1 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2E-B1 exchangeable notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2B-I2 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2E-B2 exchangeable notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2B-I3 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2E-B3 exchangeable notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2B-I4 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2E-B4 exchangeable notes 'BB-sf'; Outlook Stable;

--$101,332,000 class 2C-I1 exchangeable notional notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2E-C1 exchangeable notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2C-I2 exchangeable notional notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2E-C2 exchangeable notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2C-I3 exchangeable notional notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2E-C3 exchangeable notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2C-I4 exchangeable notional notes 'Bsf'; Outlook Stable;

--$101,332,000 class 2E-C4 exchangeable notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2E-D1 exchangeable notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2E-D2 exchangeable notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2E-D3 exchangeable notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2E-D4 exchangeable notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2E-D5 exchangeable notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2E-F1 exchangeable notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2E-F2 exchangeable notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2E-F3 exchangeable notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2E-F4 exchangeable notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2E-F5 exchangeable notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2-X1 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2-X2 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2-X3 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2-X4 exchangeable notional notes 'BB-sf'; Outlook Stable;

--$202,664,000 class 2-Y1 exchangeable notional notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2-Y2 exchangeable notional notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2-Y3 exchangeable notional notes 'Bsf'; Outlook Stable;

--$202,664,000 class 2-Y4 exchangeable notional notes 'Bsf'; Outlook Stable.

The following classes will not be rated by Fitch:

--$19,803,186,080 class 1A-H reference tranche;

--$9,799,029 class 1M-1H reference tranche;

--$7,014,568 class 1M-AH reference tranche;

--$7,014,568 class 1M-BH reference tranche;

--$7,117,400 class 1M-CH reference tranche;

--$97,984,000 class 1B-1 notes;

--$5,157,594 class 1B-1H reference tranche;

--$103,141,594 class 1B-2H reference tranche;

--$12,766,622,601 class 2A-H reference tranche;

--$5,666,942 class 2M-1H reference tranche;

--$5,334,298 class 2M-AH reference tranche;

--$5,334,298 class 2M-BH reference tranche;

--$5,334,298 class 2M-CH reference tranche;

--$63,333,000 class 2B-1 notes;

--$3,333,436 class 2B-1H reference tranche;

--$66,666,437 class 2B-2H reference tranche.

The notes are general senior unsecured obligations of Fannie Mae (rated 'AAA'/Outlook Stable) subject to the credit and principal payment risk of the mortgage loan reference pools of certain residential mortgage loans held in various Fannie Mae-guaranteed MBS. The 'BBB-sf' rating for the 1M-1 notes reflects the 3.05% subordination provided by the 0.68% class 1M-2A, the 0.68% class 1M-2B, the 0.69% class 1M-2C, the 0.50% class 1B-1 and their corresponding reference tranches as well as the 0.50% 1B-2H reference tranche. The 'BBB-sf' rating for the 2M-1 notes reflects the 3.40% subordination provided by the 0.80% class 2M-2A, the 0.80% class 2M-2B, the 0.80% class 2M-2C, the 0.50% class 2B-1 and their corresponding reference tranches as well as the 0.50% 2B-2H reference tranche.

The CAS 2017-C07 transaction includes two separate loan groups. One loan group will consist of loans with loan-to-value (LTV) ratios greater than 60% and less than or equal to 80% (Group 1), and another that consists of loans with LTVs greater than 80% and less than or equal to 97% (Group 2). Fitch has assigned different subordination levels to each group, as outlined above. The cash flow waterfall structure is identical for both groups.

Connecticut Avenue Securities, series 2017-C07 (CAS 2017-C07) is Fannie Mae's 23rd risk transfer transaction issued as part of the Federal Housing Finance Agency's Conservatorship Strategic Plan for 2013 to 2017 for each of the government sponsored enterprises (GSEs) to demonstrate the viability of multiple types of risk transfer transactions involving single family mortgages.

The objective of the transaction is to transfer credit risk from Fannie Mae to private investors with respect to a $34 billion pool of mortgage loans currently held in previously issued MBS guaranteed by Fannie Mae where principal repayment of the notes are subject to the performance of a reference pool of mortgage loans. As loans liquidate, are modified or other credit events occur, the outstanding principal balance of the debt notes will be reduced by the loan's actual loss severity percentage related to those credit events.

While the transaction structure simulates the behavior and credit risk of traditional RMBS mezzanine and subordinate securities, Fannie Mae will be responsible for making monthly payments of interest and principal to investors. Due to the counterparty dependence on Fannie Mae, Fitch's expected rating on the 1M-1, 1M-2A, 1M-2B, 1M-2C, 2M-1, 2M-2A, 2M-2B and 2M-2C notes will be based on the lower of: the quality of the mortgage loan reference pool and credit enhancement (CE) available through subordination and on Fannie Mae's Issuer Default Rating.

The notes will be issued as LIBOR-based floaters. In the event that the one-month LIBOR rate falls below the applicable negative LIBOR trigger value described in the offering memorandum, the interest payment on the interest-only notes will be capped at the excess of (i) the interest amount payable on the related class of exchangeable notes for that payment date over (ii) the interest amount payable on the class of floating rate related combinable and recombinable (RCR) notes included in the same combination for that payment date. If there are no floating rate classes in the related exchange, then the interest payment on the interest-only notes will be capped at the aggregate of the interest amounts payable on the classes of RCR notes included in the same combination that were exchanged for the specified class of interest-only RCR notes for that payment date.

KEY RATING DRIVERS

High-Quality Mortgage Pool (Positive): The mortgage loan reference pools consist of high-quality mortgage loans that were acquired by Fannie Mae in the first and second quarters of 2017 (1Q17 and 2Q17). The group 1 reference pool will consist of loans with LTVs greater than 60% and less than or equal to 80%, and Group 2 will consist of loans with LTVs greater than 80% and less than or equal to 97%. Overall, the reference pool's collateral characteristics are similar to recent CAS transactions and reflect the strong credit profile of post-crisis mortgage originations.

FEMA Exclusion Loans Removed (Positive): Fannie Mae will not include FEMA Exclusion Loans in the pool. A mortgage loan is a FEMA Exclusion Loan if it relates to a mortgage property that is included in the Federal Emergency Management Agency (FEMA) Hazus damage file for Hurricane Harvey or Hurricane Irma as of the Cut-off Date or is determined by Fannie Mae to merit exclusion from the Reference Pool due to the effects of natural disasters.

Higher HomeReady Exposure (Negative): Both groups contain loans (1.1% Group 1 and 10.5% Group 2) originated to Fannie Mae's HomeReady program, the highest percentages of any Fitch-rated transaction to date. HomeReady is an affordability program that allows LTVs up to 97% and can allow for nonstandard sources of income and down payment for qualifying borrowers. The credit profile of HomeReady borrowers is weaker on average than the overall mortgage pool, which is reflected in increased credit enhancement.

Mortgage Insurance Guaranteed by Fannie Mae (Positive): All of the loans in Group 2 are covered either by borrower paid mortgage insurance (BPMI) or lender paid mortgage insurance (LPMI). Fannie Mae will be guaranteeing the MI coverage amount, which will typically be the MI coverage percentage multiplied by the sum of the unpaid principal balance as of the date of the default, up to 36 months of delinquent interest, taxes and maintenance expenses. While the Fannie Mae guarantee allows for credit to be given to MI, Fitch applied a haircut to the amount of BPMI available due to the automatic termination provision as required by the Homeowners Protection Act when the loan balance is first scheduled to reach 78%.

12.5-Year Hard Maturity (Positive): The notes benefit from a 12.5-year legal final maturity. Thus, any credit or modification events on the reference pool that occur beyond year 12.5 are borne by Fannie Mae and do not affect the transaction. Fitch accounted for the 12.5-year hard maturity in its default analysis and applied a reduction to its lifetime default expectations.

Limited Size/Scope of Third-Party Diligence (Neutral): Fitch received third-party due diligence on a loan production basis, as opposed to a transaction-specific review. Fitch believes that regular, periodic third-party reviews (TPRs) conducted on a loan production basis are sufficient for validating Fannie Mae's quality control processes. Fitch views the results of the due diligence review as consistent with its opinion of Fannie Mae as an above-average aggregator; as a result, no adjustments were made to Fitch's loss expectations based on due diligence. See Third-Party Due Diligence for more details.

Solid Alignment of Interests (Positive): While the transaction is designed to transfer credit risk to private investors, Fitch believes that it benefits from a solid alignment of interests. Fannie Mae will be retaining credit risk in the transaction by holding the 1A-H and 2A-H senior reference tranches, which have an initial loss protection of 4.00% and 4.25%, respectively, as well as the first loss B-2H reference tranches, sized at 0.50% for each group. Fannie Mae is also retaining an approximately 5% vertical slice/interest in each group's Reference Tranches (M-1H, M-AH, M-BH, M-CH, and B-1H).

RATING SENSITIVITIES

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

This defined stress sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10%, 20% and 30%, in addition to the model projected sMVD. It indicates there is some potential rating migration with higher MVDs, compared with the model projection.

Fitch also conducted defined rating sensitivities which determine the stresses to MVDs that would reduce a rating by one full category, to non-investment grade, and to 'CCCsf'. For example, additional MVDs of 12%, 12% and 37% would potentially reduce the 'BBBsf' Group 1 rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively. Additional MVDs of 11%, 11% and 36% would potentially reduce the 'BBBsf' Group 2 rated class down one rating category, to non-investment grade, and to 'CCCsf', respectively.

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

Fitch was provided with due diligence information from AMC Diligence, LLC (AMC) and Adfitech. The due diligence focused on credit and compliance reviews, desktop valuation reviews and data integrity. AMC examined selected loan files with respect to the presence or absence of relevant documents. Fitch received certification indicating that the loan-level due diligence was conducted in accordance with Fitch's published standards. The certification also stated that the company performed its work in accordance with the independence standards, per Fitch's criteria, and that the due diligence analysts performing the review met Fitch's criteria of minimum years of experience. Fitch considered this information in its analysis and the findings did not have an impact on the analysis.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

The offering documents for CAS 2017-C07 do not disclose any representations, warranties, or enforcement mechanisms (RW&Es) that are available to investors and which relate to the underlying asset pools. Please see Fitch's Special Report for further information regarding Fitch's approach to the disclosure of a transaction's RW&Es as required under SEC Rule 17g-7.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Feb 1, 2018
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