Jumbo mortgage-backed securities issuers making their debut in the post-crisis market last week owe a lot to pioneer Redwood/Sequoia Trust, but also introduce some new elements in their respective deals.
JPMorgan’s first post-crisis deal in this market, which is backed by about a $616.3 million loan pool, includes collateral from longtime Redwood deal participant First Republic Bank, for example. Also new issuer EverBank, which has a transaction backed by approximately a $308.4 million loan pool, previously contributed some loans to a recent Redwood transaction.0
As jumbo issuers have slowly multiplied, analysts testify that loan quality remains extremely strong with slight variations. The EverBank transaction may have a slightly higher LTV than the JPMorgan transaction, for example, but it is not a significant difference, Fitch senior director Vanessa Purwin noted in an interview.
But some aspects of more recent deals are continuing to diversify more broadly. For example, the retained interests that have been standard in
Differences in reps and warrants that have been seen in the post-crisis jumbo mortgage-backed securities market also continue. The JPM deal’s reps and warrants, for example, are considered “weak” although presale reports note there are several offsets. Although some analysts have said generally that extremely weak reps and warrants could bar top investment grade ratings altogether, deals including classes with some top ratings are getting done with some degree of rep and warranty “weakness.”
Part of the reason may be because, while not all new issuers and deals may be on par with Redwood’s benchmark transactions, they still represent a marked improvement from pre-crisis deals, said Fitch managing director Roelof Slump in an interview.
Also, “we should not lose sight that [the JPMorgan transaction] is—overall—a very good pool; although we certainly highlighted some aspects on the rep and warranty side” that contributed to higher credit enhancement requirements, he noted. When asked if this could be quantified, he noted that credit enhancement levels for the top rating needed to be 7.4% to be adequate given Fitch’s concerns about the overall deal, compared to 6.25% based on an analysis of the collateral itself.
Given analysts’ stress on a holistic approach to ratings, it is worth noting that a strong rep and warranty framework may only go so far. EverBank’s deal, for example, has “a solid rep and warranty framework,” Purwin said. But as an R&W counterparty the company was a “net negative.” A mix of considerations follow from there: EverBank’s origination track record, for example, is strong relative to some peers, and it is currently retaining servicing in the transaction. But its securitization track record is lacking, limited to the current deal and loans sold into other players’ transactions in the past.
Slump also noted that some key rep and warrant concerns that came out during the downturn were not linked to the reps and warrants themselves. “I think that to some extent an argument can be made, that some of the peak vintage securitizations had good reps in them. The problem was, there wasn’t a good enforceability mechanism,” he said. “You can have good rep and warranty language in a deal, but if the overall framework that does not exist to really leverage that then the value is diminished...For the most part it seems that most newer transactions have attempted to deal with those issues.”
Fitch senior director Michele Patterson said some of the main enforcement mechanisms much improved in the JPM transaction and other post-crisis jumbo deals include the inclusion of a third party breach reviewer, arbitration to settle disputes over whether was a breach, automatic reviews of loans hitting certain performance triggers for breach and third party due diligence reviews of loan documents.
Weaknesses that exist in some post-crisis deals include: missing reps, use of qualifiers on other key reps, the inclusion of materiality conditions in determining a breach, sunsets on some of the rep and warranty provisions, and reps coming from underlying originators “that are not, in all cases, passed through to benefit of this transaction and the investors in the transaction,” Slump said.
