A new, massive mortgage bond being brought to market by JPMorgan Chase Bank is a record breaker on several fronts.
Not only is the $1.88 billion residential mortgage-backed securitization one of the largest RMBS deals since the housing crisis, Chase Mortgage Trust 2016-1 is also the first RMBS deal that qualifies for the Federal Deposit Insurance Corporation’s Safe Harbor rule, which took effect in 2010.
Under the FDIC’s Safe Harbor rule, assets being transferred for securitization cannot be seized by the FDIC if the issuing firm fails or is taken over in receivership.
According to sale documentation from Moody’s Investors Service, the securitized loans backing Chase 2016-1 are“isolated from consolidation risk in the unlikely event that the sponsor, JPMorgan Chase Bank, becomes insolvent.”
And according to Moody’s and Fitch Ratings, which also rated the Chase deal, the deal’s adherence to the FDIC’s Safe Harbor rule makes it attractive to investors.
Part of what sets this deal apart is the “alignment of interests” that will exist between Chase and the deal’s investors.
According to Fitch, the FDIC rule requires the sponsor, Chase, to retain an economic interest of at least 5% of the credit risk of the securitized assets, which Fitch believes will benefit the deal because of a strong alignment of interest in the credit risk of the underlying collateral.
Moody’s agrees with that characterization, stating that Chase’s retention of 5% of each class effectively provides some risk retention and aligns its incentive with investors in the transaction.
Moody’s adds that there are several features of the deal that make it “unique” to the post-crisis securitization environment, including:
Pro-rata payment structure with multiple and more stringent performance triggers than other post-crisis transactions; these triggers redirect to the more senior notes cash that would otherwise go to the junior notes in the event of performance deterioration
Lack of principal and interest servicer advancing that will boost ultimate liquidation recoveries on delinquent loans available for senior bondholders. The lack of P&I advancing will also reduce the unpredictability of cash flows driven by servicer stop-advance policies or practices
Immediate recognition of modification losses that allocates more cash to senior bonds because written-down junior bonds accrue less interest
According to Moody’s, these features will result in new protections for the senior bonds and ensure better alignment with senior investors' interest.
Fitch and Moody’s also both noted the “high quality” of the underlying mortgages.
According to Moody’s report, Chase 2016-1 is a securitization of a pool of 6,111 fixed-rate prime conforming and non-conforming fully amortizing loans with a total balance of $1,887,187,001 and a remaining term to maturity of 343 months.
According to both ratings agencies, roughly 75% of the underlying loans are conforming, while the remaining 25% are non-conforming.
The loans carry a weighted average seasoning of 14 months.
Moody’s noted that the borrowers in this transaction have high FICO scores and "sizeable" equity in their properties. The WA original FICO score is 768 and the WA combined original loan-to-value ratio is 79.6%.
“Although the majority of the loans were originated through a correspondent lender (65.7%), this is offset by the stronger property types (56.5% single-family), occupancy (99.4% owner-occupied) and purpose (67.3% purchase) of the loans,” Moody’s stated in its report
Additionally, the pool is “geographically diverse” with 25.4% of the loans coming from California, 9.6% from New York and 8.9% from Texas.
For those reasons, and more, both Fitch and Moody’s awarded triple-A ratings to the $1.656 billion Class A tranche.