Fitch Ratings believes Nomura Corporate Funding Americas new prime residential mortgage-backed securities transaction does not have enough credit enhancement to achieve high-quality tranches.

The platform NRP Mortgage Trust 2013-1 is backed by high quality originations from First Republic Bank and the loans have notably strong attributes.

However, the big kicker of the deal is the high degree of geographic concentration with nearly 75% of the loans located in California. 

As such, analysts for the credit ratings agency believe that the credit enhancement for the senior class would need to be between 9% and 10% in order to achieve ‘AAA’ ratings. 

To put it into perspective, the deal is currently structured with credit enhancements of 7.6%. 

“Fitch believes that geographic concentration can expose transactions to weak performance in a single region or industry,” explained Roelof Slump and Rui Pereira, managing directors for Fitch.

They added, “As such, this is a direct driver in Fitch’s analytical process. Due to the geographic concentration risk, Fitch would apply a 75% increase to the default frequency assumption for this pool.”

Another important factor is that four of the 10 metropolitan statistical areas represented in the transaction have market values over 20% and make up approximately 50% of the pool.

Over the last year, home prices in many California metros have grown by more than 15%.

Due to these movements, Fitch views these price levels as increasingly overvalued, with a heightened risk of home price declines. 

“While the attributes of the underlying pool are strong, Fitch believes that meaningful risk is introduced with concentrations of loan production. This contributed to Fitch’s perception that higher credit enhancement is needed for NRPMT 2013-1 as compared to other high quality securitizations,” the analysts concluded.