Better credit metric in New Residential's next RPL/NPL RMBS
New Residential Investment Corp. is marketing one of its strongest portfolios of pre-crisis prime mortgages to date, according to rating agency presale reports. The 2018-1 transaction is partially backed by mortgages it acquired through its July purchase of Shellpoint Partners.
Moody’s Investors Service stated the $599.7 million transaction is New Residential’s highest-quality NPL/RPL securitization to date. Both Moody's and DBRS have assigned projected losses of less than half its previous shelf offerings of bonds backed by performing and reperforming loans acquired by New Residential.
Moody’s Investors Service and DBRS estimate a stress-level net loss of 9.4% and 9.2% on the senior notes; that compares to loss estimates ranging from 15.75% and 20.25% in previous New Residential trust deals this year.
The latest transaction offers a higher weighted average adjusted FICO (736) than previous deals, and a pool exclusively made up of hybrid adjustable-rate mortgages with historically clean performance (96% have been paying on time for at least two years). Previous deals have primarily pooled fixed-rate loans.
For the first time, New Residential is including a large portion of loans not obtained as called collateral from terminated pre-crisis RMBS transactions. New Residential 2018-4 has 42.8% of the collateral pool built from its recently acquired portfolio of loans. In July, New Residential completed its $190 million acquisition of Shellpoint Partners, a mortgage platform with $57.8 billion in outstanding loans in its managed portfiolio. Shellpoint includes the lending operations of New Penn Financial and Shellpoint's mortgage servicing unit.
The New Residential Mortgage Trust 2018-4 includes 3,356 loans with average remaining balances of $178,695. That is higher relative to previous New Residential trust issues, but Moody's attributes that to the early-term negative amortization features of the original ARM loans. All the loans are now amortizing with the expiration of those option ARM terms. The WA loan-to-value ratio of the pool is 62.5% (as rated by DBRS) and 54.1% (Moody’s).
None of the loans are qualified mortgages under Dodd-Frank Act standards, due to their age.
The capital stack is deep with 61 classes of fixed-rate bonds paying either only principal, principal and interest or interest-only cash flow streams (several notes will be issued with exchangeable features, as well). Eight Class A note tranches – four standard P&I notes and four interest-only note tranches – have preliminary triple-A ratings from DBRS, benefiting from 11.4% credit enhancement through the subordination of junior notes. Moody’s triple-A rating was applied only to the P&I notes.
Moody’s noted that the transaction includes a subordination floor, which means the lower-ranked bonds do not collect principal if the amount of subordinate bonds outstanding falls below 1.25% of the original principal balance. Principal also stops flowing to the junior bonds in the event the Class A credit enhancement level falls below the current 11.4% threshold.
Moody’s did express concern over two weak points in the transaction: the deep capital structure and the trust’s buyback terms on delinquent loans.
Moody’s reported the cascade of note tranches is weaker for the senior bonds compared to a “pure sequential pay structure” since the subordinate bonds receive a pro rata share of principal payments – plus increasing shares of prepayments after an undisclosed step-down date. “In a scenario where losses are back-ended, there may not be sufficient credit enhancement to cover the losses,” Moody’s warned.
The concern over terms of the sponsor’s repurchase of delinquent loans stems from what the agency said was a “lack of detail” on how the servicers would evaluate property value and obtain open-market bidding.
Moody’s pointed to a potential conflict of interest between New Residential and the portfolio’s two largest servicers that share business ties. New Penn Financial LLC (d/b/a Shellpoint Mortgage Servicing) is the newly acquired affiliate; and Nationstar Mortgage has a commercial relationship with the sponsor outside of the transaction.
Because of those connections, the servicers are required to receive two other independent bids to obtain the maximum proceeds on a sale based on the present value of the homes.
But the “transaction documents provide little detail on the method of receipt of bids and there is no set minimum sale price,” Moody’s wrote. “Such lack of detail creates a risk that the independent bids could be weak bids from purchasers that do not actively participate in the market. Furthermore, the transaction documents provide little detail regarding how servicers should conduct present value calculations when determining if a note sale should be pursued.”
The level of defaulted mortgages could also rise in this portfolio with a hike in Libor rates, Moody’s stated. And 60-day delinquencies have been elevated in recent New Residential transactions in comparison to peer RPL ABS issuers, according to Moody's.