Morgan Stanley's (NYSE: MS) first new private-label residential mortgage-backed securitization since the housing crisis will be backed by adjustable-rate seven-year jumbo loans, rather than the fixed-rate 30-year mortgages that have generally backed other post-crisis nonagency transactions.
First Republic Bank, a lender that been producing loans for PL RMBS since Redwood Trust's Sequoia securitization vehicle restarted the market post-crisis, is the source of all the mortgages in the $256 million pool backing the deal, according to a Fitch presale report. The loans in the deal stem from a bulk purchase and some have over a year of seasoning, but still generally are no more than 18 months old.
Around 60% of the adjustable-rate mortgages in the deal have interest-only periods as opposed to a "sprinkling" in other deals, said Vanessa Purwin, a senior director in Fitch's U.S. RMBS group. However, First Republic Bank originated all of these loans prior to the implementation of January rules that holds lenders responsible for determining borrowers' ability to repay. IO loans under the ATR rule are ineligible for the qualified mortgage safe harbor that provides a greater degree of liability protection to lenders that originate within its bounds. All loans originated since the rules went into effect are QM loans.
Fitch has increased credit enhancement requirements for ratings to account for the potential payment shock from the adjustable rates and IO periods on the loans in the pool, but the larger contributor to higher credit enhancement requirements is the geographic concentration, Purwin said.
"Forty-six percent of the pool is in San Francisco, which increases the probability of default to a level almost twice as much as it otherwise would be for the pool," Purwin said, noting that the market's original issuer, Redwood Trust's Sequoia vehicle, also relied heavily on First Republic at the outset and started with similarly high geographic concentrations in early deals. It later reduced this concentration in its transactions.
Sixty-five percent of the properties backing the loans in the pool are in California, and the concentration the deal has in its top three metropolitan statistical areas of San Francisco, New York and Boston is higher that deals in the market normally have, according to the presale report.
The percentage of loans with second liens is a little higher than normal for post-crisis PL RMBS issuances, closer to 20% than the 15% seen in at least one recent deal. But combined loan-to-value ratios remain low even on these loans, at around 60%, she said.
First Republic has made a practice of using some alternative documentation techniques on the loans it originates. Borrowers who have accounts with the bank and whose reserves meet a certain threshold have their assets verified using screenshots of their online account information. There are 150 of these "stated, partially verified" loans in the deal, representing a little more than 51% of the pool. However, Fitch considers the loans fully verified because First Republic has a complete record of the borrowers' assets and reserves.