Flashback? New AAA mortgage bond features pre-crisis subprime, Alt-A mortgages

Seasoned loans have 'strong performance history'

In a move that could lead some to have flashbacks of the housing crisis, a new AAA-rated mortgage bond is about to hit the market, but what makes this new mortgage bond a blast from the past is the fact that it features pre-crisis subprime and Alt-A mortgages.

But before everyone goes thinking that this new mortgage bond is a harbinger of the housing crisis redux, nearly three-quarters of the loans in the deal have never been modified, while nearly all of the remaining loans were previously modified and are current.

New Residential is bringing the new securitization to market under its New Residential Mortgage Loan Trust label.

The deal, New Residential Mortgage Loan Trust 2016-1, is a securitization of $261.2 million of first-lien, seasoned mortgage loans with weighted average seasoning of 150 months.

Moody’s Investors Service handed the vast majority of the tranches of the deal “AAA” ratings, citing the “strong performance history” of the underlying loans.

According to Moody’s pre-sale report, 74.2% of the loans in this deal have never been modified and have been performing while approximately 25.8% of the loans were previously modified but are now current.  

All of the loans in this new deal were previously securitized and the seller, NRZ Sponsor VI LLC, has previously purchased or will purchase all of the underlying loans, in connection with the termination of various securitization trusts.

Moody’s notes that the loan pool is more than 12 years seasoned, making the loans’ originators “less relevant.” However, it’s still interesting to see a new securitization in 2016 featuring names like Countrywide Home Loans and GMAC Mortgage and featuring origination dates from 2001-2005.

The largest segment (19.39%) of the new securitization comes from a 2005 securitization from Merrill Lynch Mortgage Investors.

But, as Moody’s noted, the loans are performing and have been performing, and instead of basing a portion of its ratings on the originator, Moody’s stated that it is using the performance of the terminated securitizations in its ratings decisions.

According to Moody’s data, of the 1,789 loans that make up this deal, 28.6% (or 877) of the loans were underwritten to Alt-A guidelines when they were originated.

Additionally, 481 loans, 24.6% of the pool, were originated to subprime guidelines, while 431 loans, 46.7% of the pool, were originated to prime guidelines.

According to Moody’s report, part of its ratings decision was based on historical data related to the default rate for prime, subprime and Alt-A mortgages.

Historical data suggests that over the past five years Alt-A mortgage loans have performed slightly worse than prime loans but better than subprime loans, Moody’s noted.

According to Moody’s data, the 12-month default rate for always current prime loans is 1.6%, while the 12-month default rate for always current Alt-A loans is 3.1%, and the 12-month default rate for always current subprime loans is 3.7%.

Moody’s stated in its report that it estimated an expected annual default rate of 5.35% for this deal.

According to Moody’s pre-sale report, the underlying loans carry a weighted average updated loan-to-value ratio of 60.7% and weighted average updated FICO score of 697.

Moody’s noted that approximately 88.4% of the loans have been either current or 30 days delinquent in the past 24 months. Of the loans that have been greater than 30 days delinquent within the past 24 months, 33.5% cured on their own and 66.5% were modified.

Additionally, Ocwen Loan Servicing, Nationstar Mortgage and PNC Mortgage are the main servicers involved, with Ocwen servicing 65% of the pool. Nationstar Mortgage will act as master servicer.

Moody’s also noted that a third-party due diligence provider conducted a compliance review on a sample of 769 loans proposed to be included in the mortgage pool.

The regulatory compliance review consisted of a review of compliance with Section 32/HOEPA, Federal Truth in Lending Act/Regulation Z (TILA), the Real Estate Settlement Protection Act/Regulation X (TILA), and federal, state and local anti-predatory regulations.

Moody’s stated that the third-party due diligence review identified 567 loans that had compliance exceptions, the majority of which were due to missing HUD and/or TIL documents, under-disclosed finance charges, missing right-to-cancel disclosures, or missing FACTA disclosures.

Although the diligence provider's report indicated that the statute of limitations for borrowers to rescind their loans has already passed, borrowers can still raise these legal claims in defense against foreclosure as a set off or recoupment and win damages that can reduce the amount of the foreclosure proceeds, Moody’s noted.

The seller, NRZ Sponsor VI LLC, is providing a representation and warranty for the missing mortgage files, Moody’s said.

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