Morgan Stanley joins the jumbo RMBS party

Brings $256.5 million prime offering to market

While the overall market for residential mortgage-backed securitizations remains small compared to the pre-bust days, the jumbo RMBS market appears to be growing.

The rise of jumbo lending, or loans that exceed the Qualified Mortgage requirements from the Consumer Financial Protection Bureau, has led to more players in the burgeoning securitization space seeking to capitalize on high income, low debt-to-income borrowers.

Two weeks ago, Credit Suisse (CS) brought its third prime, jumbo RMBS to market in 2014. CSMC Trust 2014-IVR3 was backed by 526 mortgage loans with a total principal balance of $363.63 million.

A week later, Two Harbors Investment Corp (TWO) launched its second Agate Bay Mortgage Trust residential mortgage-backed securitization. The $267.67 million deal was backed by 334 mortgage loans with an average unpaid balance of more than $800,000.

And now Morgan Stanley (MS) is set to bring its first jumbo RMBS of the year to market soon. Morgan Stanley Residential Mortgage Loan Trust 2014-1 is supported by 291 mortgages with a total balance of approximately $256.5 million.

Fitch Ratings has issued its presale report and awarded $229.29 million in AAA ratings to the securitization’s two largest tranches.

According to Fitch, the high quality of the mortgage pool and the quality of the loan originator are significant positive indicators for the securitization’s future performance.

The collateral pool consists of seven-year hybrid adjustable-rate mortgages to borrowers with “strong credit profiles, low leverage, and substantial liquid reserves,” Fitch said.

“The MSRMLT 2014-1 transaction is supported by a pool of seven-year hybrid ARM loans with strong attributes,” Fitch said. “The borrowers have considerable equity in the properties and substantial liquid reserves. Roughly two-thirds of the loans (63%) have a 10-year IO period while the remaining 37% are fully amortizing.”

All of the loans in the pool were originated by First Republic Bank (FRC), which Fitch said it considers to be an “above-average” originator of prime, jumbo loans. Third-party, loan-level due diligence was conducted on 100% of the pool with minimal findings indicating strong underwriting controls, Fitch said.

The loans carry an average balance of $881,370 and carry an average seasoning of 14 months. The pool carries a weighted average loan-to-value ratio of 60.8%, a weighted average FICO score of 771 and a weighted average debt-to-income ratio of 27.8%.

Fitch lists “payment shock exposure” as a possible concern for the deal.

“The pool consists entirely of ARM loans while more than half also have interest-only features originated prior to January 2014,” Fitch writes in its presale. “Loan products that result in periodic changes in a borrower’s payment such as ARMs and IOs expose borrowers to payment reset risk. Future rises in interest rates and payment re-amortization after the expiration of interest only periods can increase monthly payments considerably.”

Subsequently, Fitch applied a probability of default penalty to the loans.

Of note in the pool is the geographic concentration of the borrowers. Nearly two-thirds of the loans (65.3%) come from California. New York ranks second in the pool with 17.7% of the loans and Massachusetts is third at 8.7%. In total, the top three states make up 91.6% of the pool.

Also of note, only 60.6% of the underlying properties are listed as single-family residences. Condos account for another 27.4% of the pool, which is a much higher percentage than in the previous jumbo RMBSs.

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