In its continuing effort to offload some of the credit risk it carries, Fannie Mae is preparing to launch a new credit-risk sharing deal with the help of JPMorgan Chase (JPM).
In its previous four risk-sharing deals, Fannie has released the deals itself under its Connecticut Avenue Securities platform. Its last Connecticut Avenue offering was its largest, checking in at $2.05 billion.
The previous Connecticut Avenue offerings included reference loans with original loan-to-value ratios of up to 97%.
Now, Fannie is partnering with JPMorgan to launch a new risk-sharing vehicle, J.P. Morgan Madison Avenue Securities Trust. The first offering in the series checks in at $989 million, but there are differences from the Fannie’s previous risk-sharing offerings, according to Fitch Ratings’ presale report.
Fitch said that the deal will simulate the behavior of an approximately $989 million pool of JPMorgan-originated mortgage loans that will secure Fannie Mae-guaranteed mortgage-backed securities.
But there are several key differences, Fitch said. According to Fitch’s report, the bonds will be issued from a special-purpose trust whose security interest consists of the cash collateral account, an interest account, a retained interest-only strip and a reserve account, all of which will be used to pay principal and interest on the notes, instead of Fannie issuing the notes itself.
“Payments will be made to Fannie Mae for mortgage loans that become 180 days or more delinquent or when certain other recourse events occur,” Fitch said. “Upon the occurrence of a recourse event, a payment will be made to Fannie Mae from amounts in the CCA not to exceed 4.75% of the initial mortgage pool balance.”
According to Fitch, all of the mortgages were originated by JPMorgan and purchased by the trust, which will sell the mortgage loans to Fannie Mae to be held in a newly issued Fannie Mae-guaranteed MBS.
“The issuer will retain an IO strip of 26.88 basis points off the mortgage pool and issue the class M securities and class X-IO certificates,” Fitch explained. “Payments to class M-2 certificates and X-IO certificates are subordinated to class M-1.”
Fitch issued a BBB- rating to the $19.78 million M-1 class and will not issue ratings to any of the other classes.
“Proceeds from the sale of class M notes will be deposited in a CCA,” Fitch said. “Payments to M-1 notes will be paid from amounts on deposit in the CCA, interest account and reserve account. Amounts received from the retained IO strip will be deposited in the interest account to pay interest to class M securities.”
Fitch said that the collateral pool is high quality, featuring prime-quality, 30-year, fully amortizing and fully documented fixed-rate mortgages to borrowers with strong credit profiles and low leverage. The pool is also geographically diverse, which Fitch said is a positive.
In total, there are 3,792 loans in the JPMMA 2014-1 pool, with an average loan balance of $260,846. The underlying collateral carries a weighted average loan-to-value ratio of 76% and an average FICO score of 750.
The average seasoning on the underlying loans is two months.
The risk retention structure is different than the Connecticut Avenue deals as well.
“Unlike the CAS transactions where Fannie Mae retains the first loss class and a vertical slice of the class M securities, Fannie Mae will only absorb losses once the 4.75% protection provided by the class M securities is depleted,” Fitch said.
“While Fitch views more positively those transactions that more closely align the interests of the subordinated noteholders with those of the senior holders, there is little incremental risk, if any, with this transaction, as Fitch expects Fannie Mae to maintain and enforce its policies nondiscriminately across all its approved seller/servicers.”
When contacted, JPMorgan and Fannie Mae both declined to comment on the new offering.