SoFi is preparing for its first ever residential mortgage-backed security transaction just two years after breaking into the mortgage business.
SoFi, also known as Social Finance, moved into the mortgage space in the second half of 2014, expanding past its standard student loan refinancing products.
Capitalizing on the borrower pool it already had, SoFi managed to quickly grow its mortgages business by marketing primarily to early career professionals who possess a graduate education from elite universities and a high discretionary income. SoFi refers to this client base as high earners not rich yet or “HENRY.”
The company made significant progress in September 2015 when it announced that it closed a $1 billion equity round, which it planned to use to fuel its growth in product innovation, delivery, community value and its team.
Most recently, the lender caught a lot of attention over its new loan option that allows homeowners to refinance their mortgage at a lower rate and pay down the balance of an existing student loan.
All these initiatives led the company to its first residential mortgage-backed security transaction SoFi Mortgage Trust 2016-1 (SFPMT 2016-1).
According to the presale report from Fitch Ratings, the certificates are supported by 270 loans with a total balance of approximately $168.79 million as of the cutoff date. The pool consists of prime fixed-rate mortgages originated by SoFi Lending Corp.
This pool of loans stays true to what SoFi is known for, an elite group of borrowers, usually deemed as “great” in its ad campaigns, with strong credit.
The Fitch report stated that the collateral attributes of the pool are among the strongest of those securitized and rated by Fitch.
For starters, the pool has a weighted average FICO score of 777 and an original combined loan-to-value ratio of 56.5%. As an added perspective, the average Millennial has a FICO score of 695, and only a little more than 20% of Millennials have a credit score of 720 or higher, with only 40% of the total population even having a credit score of 720 or higher.
Here are some highlights of the collateral that Fitch highlights:
- High FICO scores (777) reflect high credit-quality borrowers. This is higher than most transactions issued post crisis.
- Low sLTV (59.6%) shows substantial equity remains after experiencing a base-case market value decline (MVD) adjustment of 6.8%.
- Product type: the collateral pool consists of 100% fixed rate mortgages broken out between 30-year loans (78.2%) and 15-year loans (21.8%).
- SoFi originations: 100% of the pool was originated by SoFi. Fitch considers SoFi to be an average originator.
- Property type and occupancy: The pool comprises 88.2% single-family and 99.3% owner- occupied properties.
- Channel: 100% of the collateral was originated via the retail channel.
SoFi originates mortgages for whole loan sales to mortgage investors and for securitization purposes, Fitch stated. Fixed rate residential mortgage loans with a loan-to-value (LTV) ratio below 65% (this pool sits at 59.6%) are typically aggregated for securitization, with the remaining production typically sold to bank aggregators and other financial institutions.
The only items that pop up with a concern is due to the portfolios heavy concentration in California, otherwise known as concentration risk.
The pool has a relatively low number of loans (270) and is heavily concentrated in California (78%). Concentration and adjustments based on deterministic tests resulted in roughly a 2.0x increase to the mortgage pool loss assumptions, the repot noted.
Fitch stated that the pool has a high concentration of borrowers in areas that are susceptible to large-scale earthquakes.
However, based on the historical experience of loans affected by the Northridge earthquake in 1994, Fitch believes investment-grade classes will likely be protected against a similarly sized earthquake due to increased credit enhancement and the unusually strong credit quality of the borrowers.
After this geographical concern, the pool is filled with a lot of positives: high-quality mortgage pool, solid due diligence results, straightforward deal structures and high credit enhancement floor.
The neutrals included: new lender and Tier I representation and warranty framework.
As of September 30, 2016, portfolio delinquency has been extremely low. The portfolio had no defaulted loans, and only one loan had ever been delinquent for 60 days or more.