Starwood makes concessions to COVID-19 risks in $538M non-QM RMBS

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Starwood Capital Group is adapting its RMBS strategy for COVID-19, most notably through additional protections for senior noteholders to mitigate the substantial number of deferred mortgage accounts included in its newly sponsored deal.

Starwood, which has invested in and securitized non-prime single-family and multifamily mortgages since 2016, is marketing bonds backed by a pool of $585.5 million in non-agency loans acquired from three originators through its Starwood Property Trust (NYSE: STWD) subsidiary.

Of the 890 mortgages in the Starwood Residential Mortgage Trust 2020-2 collateral pool, 302 – representing 38.9% of the pool balance – already subject to active forbearance plans, according to ratings agency presale reports.

Borrowers who qualified for the forbearance plan will be able to defer mortgage payments for 90 days.

To counter the risks of further forbearance, delinquencies and unknown future modifications, the latest Starwood transaction is constructed with a short-term liquidity backstop account of $3 million, allowing for preferential interest allocation to the senior-note classes in the deal.

In addition, the capital stack with a sequential payment structure of principal and interest across the senior, mezzanine and subordinate tranches. More typically, post-crisis RMBS deals have senior tranches that receive a designated pro rate share of mortgage principal and interest payments from the pool of borrowers.

Also different for Starwood’s 2020-2 transaction: there are no mandatory servicer advances on delinquent loans, which Kroll Bond Rating Agency will likely result in lower loss severities to the trust.

Both Kroll and DBRS Morningstar have assigned preliminary AAA ratings to the $381.9 million Class A certificate tranche in the deal.

The loans in the deal are primarily non-qualified, large-balance mortgages to borrowers who otherwise did not qualify for GSE financing – either because of a recent foreclosure of bankruptcy (only 3.4% of the pool) or were underwritten through alternative documentation. Over 75% of the borrowers qualified through 12-month or 24-month bank statement verification.

Nearly 76% of the pool involves owner-occupied loans, but are designated “non-QM” under Consumer Financial Protection Bureau guidelines that make them ineligible for purchase by Fannie Mae or Freddie Mac. Over 20% are investor-property loans which are exempt from the CFPB’s standards, since those are business-purpose loans.

Nearly 90% of the loans were originated from three primary lenders: Homebridge Financial Services, Luxury Mortgage Corp. and Impac Mortgage Corp.

The average borrower in the pool is a prime borrower with a weighted average original credit score of 730, annual income of $900,072 and liquid reserves of $423,078.

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