JPMorgan Chase & Co. (JPM) is preparing to bring its second residential mortgage-backed securitization this year. The RMBS series is backed entirely by adjustable-rate mortgages to market.

J.P. Morgan Mortgage Trust 2015-IVR2 is backed by 382 loans with a total balance of approximately $372.4 million. Each of the underlying loans is a 7-year hybrid adjustable-rate mortgage and carries a 30-year total term. The average loan balance is $974,964.

Kroll Bond Rating Agency, Moody’s Investor Service and Fitch Ratings each issued presale reports on the offering, and each ratings agency awarded AAA ratings to the majority of the offering’s classes.

All three agencies cited the quality of the collateral as a positive for the deal.

In its presale report, Moody’s said that the collateral quality is better than some other recent jumbo securitizations.

“JPMMT 2015-IVR2 consists of high quality, prime mortgage loans made to borrowers with significant equity in their property, as demonstrated by the pool’s weighted average loan-to-value of 64.7% and WA combined LTV of 66.5%,” KBRA said in its presale.

“Approximately 36.3% of the mortgages have a CLTV of 75% or greater,” KBRA continued. “There are no loans with a CLTV greater than 80%, although 83 loans (20.0%) have CLTVs of exactly 80%. The aggregate pool’s notably low LTV and CLTV ratios exhibit significant borrower equity and provide a margin of safety against potential home price declines.”

Unsurprisingly, the underlying borrowers also have strong credit profiles.

“The weighted average original FICO, annual household income and total assets reported were 758, $733,777 and $2.13 million, respectively,” Fitch noted in its presale. “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.”

One concern of the deal is the payment shock exposure due to the presence of ARM loans.

According to the presale reports, approximately 39% of the underlying loansa also carry a 10-year interest-only period.

“Mortgage products that include adjustable interest rates or IO features expose borrowers to the risk of fluctuating or increasing monthly payment obligations, which can result in payment shock,” KBRA said. “The payment shock to the borrower for hybrid ARMs and IO loans can be significant, particularly in a historically low interest rate market. In such an environment, rate increases are likely and refinancing opportunities may be limited.”

KBRA added that the risk of payment shock is mitigated by the loan originator’s underwriting procedures. According to the presale reports, 100% of the loans in JPMMT 2015-IVR2 were originated by First Republic Bank, which according to KBRA’s report, is a lender with “an extensive history of originating prime-quality loans that have outperformed” other prime mortgages.

“The risk in this transaction is mitigated by the fact that FRB originates loans to high net worth borrowers who have less risk of experiencing payment shock should the monthly payment increase,” KBRA said.

One other potential drawback is the geographic concentration. According to the presale reports, JPMMT 2015-IVR2 has significant geographic concentration in California (57.7%), specifically in the San Francisco (37.3%) and Los Angeles (11.2%) areas.

“In addition, 87.9% of the properties are located in the pool’s top five metropolitan statistical areas in California, New York, and Massachusetts,” Fitch noted. “The pool has significant regional concentrations, which resulted in an additional penalty of approximately 66% to the pool’s lifetime default expectation.”

Another potential issue is the size of some of the loans in the pool. “JPMMT 2015-IVR2 has 26 loans with current balances greater than $2 million; ten of which are above $3 million and make up 8.8% of the pool,” KBRA stated.

According to KBRA’s data, the largest loan in the pool is $4.0 million, which represents approximately 1.0% of the mortgage pool. The second largest loan is $3.5 million, or 0.9% of the pool.

On the other hand, Moody’s stated that the representation and warranty framework of the deal is robust.

“Moody's assessed the R&W framework as good and the R&W provider as strong, with a thorough, transparent, consistent and independent breach review process,” Moody’s stated. “Moody's believes this transaction has very low risk from loan defects. First Republic Bank is a strong originator with good controls and procedures and the third party reviews showed clean results. Furthermore, if there are defects, there is a high likelihood that they will be discovered and remedied.”

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