Investments

Two Harbors launching this year's first jumbo RMBS

$279.5 million offering receives AAA ratings

house money

[Update 1: Story updated with clarification on lack of representation and warranty backstop for NYCB Mortgage]

After a record-setting fourth quarter, which saw more prime jumbo residential mortgage-backed securitizations brought to market than during any quarter since the financial crisis began, 2015 now has its first prime jumbo RMBS.

Two Harbors Investment Corp (TWO) is prepping the year’s first prime jumbo RMBS, a $279.5 million offering from Two Harbors’ Agate Bay Mortgage Trust series.

Agate Bay Mortgage Trust 2015-1 is backed by 406 loans with a total principal balance of $279,487,083 and an average loan balance of $688,392. Fitch Ratings and DBRS both issued presale reports for the offering and both awarded nearly $260 million in AAA ratings to the offering.

According to both agencies, the high quality of the underlying borrowers and collateral is a significant positive of the deal.

“The collateral pool consists of very high quality 30-year, fixed- rate, fully amortizing loans to borrowers with strong credit profiles, low leverage, and liquid reserves,” Fitch said in its report.

“The pool has a weighted average FICO of 774 and an original combined loan-to- value of 67%,” Fitch added. “While the average amount of liquid reserves is lower for this pool relative to other recent transactions with comparable profiles, over 25% of the borrowers have reserves excess of 30% of their mortgage amount.”

Additionally, nearly all of the loans are subject to the ability-to-repay and Qualified Mortgage rule. Of the total pool, 399 loans (approximately 98.1% of the pool) have application dates of Jan. 10, 2014 or later, Fitch noted in its report.

The originators for the mortgage pool are George Mason Mortgage (14.9%), NYCB Mortgage Company (14.6%), United Shore Financial Services (10.1%), Mortgage Master (9.6%), Commerce Mortgage (8.6%), Parkside Lending (6.3%), American Pacific Mortgage Corporation (6.1%) and other originators, each comprising less than 5% of the mortgage loans.

According to both DBRS and Fitch, the relative inexperience of some of the originators is a potential drawback of the deal.

“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 said in its report.

On the other hand, Fitch said that all of the loans were originated to meet Two Harbors’ purchase criteria and were reviewed by a third-party due diligence firm, which found no issues with the loans.

The deal also offers a “robust” representation framework, according to Fitch.

“Fitch considers the transaction’s representation, warranty and enforcement mechanism framework to be consistent with a Tier 1 quality,” Fitch said in its report.

“The mortgage loans, except those originated by NYCB Mortgage and New York Community Bank, benefit from representations and warranties backstopped by TH TRS, an indirect wholly owned subsidiary of Two Harbors Investment Corp in the event of an originator’s bankruptcy, insolvency proceeding or if the originator has been dissolved or liquidated,” DBRS added.

But the lack of a backstop for NYCB Mortgage is not due to any issues with the lender. In fact, it's quite the opposite, according to the Jon Baymiller, NYCB Mortgage's presdient and CEO.

"DBRS did not require TH TRS to backstop NYCB’s loans due to NYCB’s current DBRS long-term rating (A-Low," Baymiller told HousingWire. "Whereas, presumably in order to help achieve the deal's credit subordination support levels, TH TRS provided such a backstop for other originators who contributed loan collateral to the deal."

As with most jumbo RMBS offerings, the largest portion of the underlying loans is located in California.

According to both agencies, 44.1% of the underlying loans are located in California.

“In addition, the metropolitan areas encompassing San Francisco, Los Angeles, and San Jose combine for 33.3% of the collateral balance and represent three of the top 10 regions,” Fitch noted in its report. “The regional concentration resulted in an additional penalty of roughly 10% to the pool’s lifetime default expectation.”

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