Investments

PIMCO hits secondary market with first non-QM mortgage bond offering

$382.45 million deal contains loans originated by Capital One

PIMCO, once a major player in the secondary mortgage market, is making a new mortgage play, as the bond giant is about to enter the secondary market for loans that don’t fit into the Qualified Mortgage box.

PIMCO is about to issue its first non-QM residential mortgage-backed securitization, a $382.45 offering backed by mortgages originated by Capital One.

The details of the offering come courtesy of a presale document from Fitch Ratings.

According to the Fitch presale report, the mortgages backing the offering are not newly originated loans. The loans in the securitization are nearly five years old, on average, which makes sense considering that Capital One began exiting the mortgage business approximately 18 months ago.

There are 1,311 “prime quality seasoned loans” with an average loan balance of $291,726 backing the offering, according to Fitch’s report. The loans were originated by Capital One then purchased a PIMCO managed private fund in a bulk sale.

And now, a private fund managed by PIMCO is issuing BRAVO Residential Funding Trust 2019-1.

According to the presale document, approximately 60% of the underlying loans are subject to the Ability-to-Repay rule, while 37% were originated before the rule went into effect in January 2014.

Fitch deems the underlying loans to be a “high-quality” pool of loans.

From Fitch’s report:

The collateral consists primarily of seasoned 30-year fixed rate mortgages, with 5.8% comprising 15 year mortgages and 7.0% seven-year hybrid adjustable rate mortgage (ARM) loans. The pool is seasoned over 50 months and has a very low weighted average (WA) current combined loan-to-value ratio (CLTV) of 60%.

The borrowers have strong credit profiles with a weighted average (WA) FICO of 752. The loans were originated through Capital One’s retail channel, which Fitch views positively. In addition 66% of the borrowers have been paying on time for the past 36 months and 18% have 24-month clean pay histories.

Fitch rates the underlying loans as a “positive” of the deal. On the other hand, the deal does have some drawbacks.

Namely, the nature of some of the non-QM loans themselves. “About 60% was underwritten to guidelines that satisfy the ATR Rule, of which 6.5% were designated as Safe Harbor QM and 54% are Non-QM due to debt- to-income ratios exceeding 43% (18%), 40-year terms (8%) and interest-only loans (2%), Fitch noted in its report.

As such, Fitch said that it applied a penalty of 55 basis points to account for potential challenges to foreclosure under the Rule.

Additionally, Fitch views the deal’s representation and warranty framework as a “negative” of the deal.

“Fitch views the representation, warranty and enforcement construct as consistent with Tier 2 quality. The Tier 2 assessment is driven primarily by the automatic review limited to realized losses resulting from ATR challenges and the optional review for all other realized losses even though, 25% of the bond holders can initiate a review,” the ratings agency wrote in its presale.

Fitch said that the reps and warrants are being provided by BRAVO III Residential Funding I Ltd, a fund with a limited life, and cautions that the fund is unrated.

But Fitch said that it is “comfortable” with the “limited life” of the fund because of the pool’s seasoning, origination source and credit quality.

Overall, Fitch expects to award $343.06 million in AAA ratings to the offering’s Class A-1 tranche, with a credit enhancement of 10.3%.

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