CarVal adds $382M to pipeline of reperforming RMBS

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Investors continue to be in a very forgiving mood with formerly troubled home buyers.

Three offerings of bonds backed by reperforming residential mortgage hit the market so far this month, the latest is a $382.4 million deal from CarVal Investors through its Mill City registered shelf. The Mill City Mortgage Loan Trust 2017-2 follows the $698.1 million New Residential Mortgage Loan Trust 2017-3 and the debut $219.9 million collateral portfolio of re-performing loans acquired by real estate investment trust MFA Financial.

So far this year, there have been 15 rated securitizations of rehabbed loans (14 of them non-agency) totaling more than $8.4 billion. Other issuer including New Residential (with three deals totaling $2.08 billion); FirstKey Mortgage’s Towd Point Mortgage Trust (two issues with a combined $3.02 billion in offered notes); and Bayview Asset Management (five deals totaling $1.15 billion).

“I just think it’s the availability of collateral and investor appetite,” said Suzanne Mistretta, a director in Fitch’s RMBS ratings unit. “They each have programs – Towd Point, Mill City and Bayview – and they seem to be absorbed pretty well by the market. There is credit enhancement, sequential pay, to the extent there is collateral, investors continue to participate.”

Fitch, Moody’s Investors Service and DBRS all expect to assign triple-A ratings to the senior tranche of notes to be issued by Mill City Mortgage Loan Trust 2017-2, which benefit from 34.45% credit enhancement. CarVal plans to hold on to 5% of each tranche of notes to be issued in order to comply with risk retention rules, according to Fitch.

The capital stack also includes sub-senior A2 and A3 notes and three Class M series that all carry investment grade ratings. Next in the cash flow are five tranches of subordinate B notes, of which only classes B1 and B2 are speculative grade-rated by Fitch and DBRS; Moody’s just rates the B1 tranche.

The notes are backed by 1,568 seasoned performing and re-performing mortgages, including a small slice (6.2% of the pool) of mortgages with home equity lines of credit attached. Partial HELOC exposure is a feature Mill City introduced to its platform in its first issuance this year.

The pool has a weighted average updated FICO of below-prime 686, and a weighted average loan-to-value ratio of 80.74%.
Fitch noted that 71% of the pool’s collateral is “clean current” loans, which have 24 months of timely payments by borrowers. The remaining 29% are considered “dirty current” portion of the pool with recent delinquencies or incomplete paystrings. Nearly 70% of the loans have been modified.

Moody’s sees two primary credit concerns. The first is the lack of detail on the degree of changes made to modified loans, such as how much a loan payment was reduced and how many payments a borrower made prior to a modification. “A borrower’s propensity to default following a loan modification declines the larger the monthly payment reduction received on the loan modification,” the presale report states. “For this pool, we did not receive information on the borrowers’ monthly payments prior to modification or the amount of payment reductions made on the loans as a result of the modifications.”

Moody’s also noted the higher-than-average percentage (10.86%) of loans with negative amortization, through loans where borrowers have adjustable rates as well as annually adjustments available on payment and amortization schedules, which could cause an accrual of interest. It is the first post-crisis RPL deal with a negative-amortization concentration greater than 10%, according to Moody’s.

It is the fifth overall securitization through the Mill City platform since December 2015.

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