Pre-Crisis MBS Features Have Pros and Cons

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WE’RE HEARING the re-emergence of some pre-crisis features in post-crisis jumbo securities is not necessarily a bad thing but investors should be aware of their risks.

“We don’t have a major concern” due to the trend, but investors should be aware that the re-emergence of multiple types of structuring may add to credit risk, said Kruti Muni, a Moody’s Investors Service senior vice president and co-author of a recent report on the topic.

“We would run additional stresses” when rating a transaction with such features, she said, noting that issuers “slice bonds thinner” to accommodate the different features, which means issuers will “probably require more credit enhancement to get to the same rating level.”

“In the good times,” there may not be as much concern, but the performance of pre-crisis deals with these features has shown that “once losses go through credit enhancement protecting these classes, the loss experienced by them will vary significantly depending on these structural nuances,” Muni said.

“We have seen some stark examples of difference in performance of these classes in pre-crisis deals where subordination is depleted,” she said.

Muni also noted that the tranches shaped by these features are “sensitive not just to the level of losses and prepayments but also to their timing.”

Some examples of the different features can be found in the following deals, according to Moody’s analysts:

• Super-senior and support bonds: Credit Suisse’s 2013-6 deal and JPMorgan’s 2013-3 transaction.

• Principal-only bonds tied to discount mortgages: Sequoia/Redwood 2013-9.

• Exchangeable notes: JPMorgan’s 2013-3 transaction and Sequoia/Redwood’s 2013-9 and 2013-10 securitizations.

As previously noted by this publication, Kroll’s recent presale report on PennyMac’s first jumbo mortgage-backed securities deal shows it recently introduced another new feature to the post-crisis MBS market, replacing the master servicer with a fiscal agent who would address the biggest risk when it comes to the absence of a master servicer, the concern that payments would not be advanced.

Pre-crisis, master servicers were primarily used in jumbo transactions when there were multiple servicers involved in the deal, but analysts and Moody’s and Kroll in separate interviews said all the post-crisis jumbo MBS securitizations they have rated to date have had master servicers with the exception of the PennyMac deal.

Risk that a servicer may have to be replaced became more of a concern during the downturn.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.