Continuing in its trend of bringing jumbo residential mortgage-backed securitizations to the market in different forms, JPMorgan Chase & Co. (JPM) is preparing a new jumbo RMBS backed by hybrid adjustable-rate mortgages.
J.P. Morgan Mortgage Trust 2014-IVR6 is backed by a pool of 397 loans with an aggregate loan balance of $402.8 million, and all but one of the loans is a seven-year ARM. The remaining loan is a six-year ARM.
According to a presale report from Fitch Ratings, approximately 61% of the underlying pool has interest only periods, including nine years for the six-year hybrid ARM loan and 10 years for the seven-year hybrid ARM loans.
Fitch awarded the Class A-1 tranche of JPMMT 2014-IVR6 with AAA ratings, and the tranche boasts a credit enhancement of 15%.
Fitch cautions on the potential for payment shock once the interest rate adjusts and the interest-only period expires in the future.
“The pool consists entirely of ARM loans while more than half also have interest-only features that were originated prior to January 2014,” Fitch said in its report.
“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.”
Fitch does note that the collateral pool consists of borrowers with “strong credit profiles, low leverage and substantial liquid reserves.”
According to Fitch’s report, the underlying collateral carries a weighted average original FICO score of 764, a WA loan-to-value ratio of 60%, a WA debt-to-income ratio of 27.6% and the underlying borrowers have WA liquid reserves of more than $3.3 million.
The average loan balance of the underlying collateral is $1,014,609.
“The CE levels reflect the very strong credit attributes of the pool,” Fitch said. “Borrowers in the pool have significant equity in their property, as reflected in a weighted average original combined LTV of 63.1%. In addition, all loans in the pool were underwritten to the originator’s full documentation standards. Third-party due diligence conducted by independent review firms found few material exceptions to lender underwriting guidelines.”
First Republic Bank originated all of the underlying loans and will act as the servicer for all of the loans as well.
“Fitch believes the transaction benefits from the presence of strong counterparties,” Fitch said. “FRB is viewed by Fitch as an above-average originator of prime residential mortgage loans, which resulted in a 15% credit to the pool’s PD. Fitch also views FRB as an acceptable servicer, and the transaction benefits from the presence of a strong master servicer, Wells Fargo Bank N.A.”
Fitch cautions on a the representations and warranty framework of the deal as a “notable weakness.”
FRB and JPMorgan Chase will collectively provide reps and warranties for the mortgage pool. “JPMMAC will provide gap reps for the FRB loans,” Fitch said. “While Fitch acknowledges the financial strength of the counterparties providing the reps and warranties, the agency believes its value is diluted by (a) qualifying and conditional language that reduces lender loan breach liability and (b) the inclusion of sunsets for a number of provisions including fraud. Despite the presence of mitigating factors, including the high credit quality pool and clean diligence results, Fitch considered the weaker framework in its expected loss estimation and CE analysis.”