Borrowers who have defaulted in the past are generally considered to be a bigger risk than those who have never missed a payment. Yet the early performance of bonds backed by rehabbed residential mortgages is pretty strong.

Of the 12 reperforming RMBS that Fitch Ratings has rated over the past two years, only two have a rate of 60-plus delinquencies greater than 5% of their current outstanding principal balance. And only one transaction has a cumulative loss greater than 1% of initial balance. The majority of this loss is attributed to the Home Affordable Modification Program, a government program introduced in 2009. One form of this program forgives part of a loan's principal over a three-year period, as long as the borrower continues to make timely payments.

No other transaction has a realized loss greater than 50 basis points, according to Fitch. The transactions continue to pay down at a steady conditional prepayment rate of roughly 10% on average.

The pace of issuance of RMBS backed almost entirely by reperforming collateral is on the increase. The first meaningful amount issuance came in 2013, when 11 transactions totaling $2.8 billion were completed. The following year saw the same number of deals but an increase of more than 20% in the dollar volume to $3.5 billion. That year also saw the first transaction to be rated since the financial crisis.

In 2015, the deal count rose to 15, most of them rated, and the dollar amount issued more than doubled from the prior year to $8.7 billion. As new issuers came to market, a standard was developed for both structure and due diligence in rated transactions.

So far this year, however, there has been a single deal rated by Fitch, Towd Point Mortgage Trust 2016-1, sponsored by Cerberus Capital Management.

On average, the nonrated transactions issued post-crisis have had weaker credit profiles than those rated by Fitch. Additionally, while the rated transactions have generally not included any significant concentrations of seriously delinquent loans at issuance, the nonrated deals have included varying amounts of delinquent loans. The weaker credit profiles and larger proportion of distressed borrowers at issuance have led to a higher rate of delinquency and greater realized loss for the nonrated deals in the first year.

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