The latest securitization of reperforming residential mortgages offers investors less protection against future losses than the previous deal, and has earned correspondingly lower safety scores from Fitch Ratings

Citigroup Mortgage Loan Trust 2015-A pools $297 million of reperforming fixed and hybrid adjustable-rate mortgages (ARMs), according to Fitch’s presale report. The loans were once delinquent, but have all been current for the past two years. Approximately 49% have received one or more modifications since origination. 

The class A-1 notes to be issued by the trust benefit from credit enhancement of 30% and Fitch expects to rate them 'A.'

By comparison, the A-3 tranche of the most recent reperforming mortgage securitization, Towd Point Mortgage Trust 2015-1, benefited from credit enhancement of 32.4%%, earning a 'A' rating from Fitch. The rating agency said in an e-mail that the credit loss protection on the single 'A' notes in each deal is "pretty similar."

The last three reperforming deals that have come to market (including Citigroup's latest deal) have each incorporated differences between the collateral and the structure.

One difference between the Citigroup deal and the Towd Point transaction is that the Citi deal is a shifting interest structure "whereby subordinate classes receive only scheduled principal and are locked out of receiving unscheduled principal or prepayments for the first five years" and and Towd Point is a sequential pay structure where the subordinate classes do not receive principal until the senior classes are re-paid in full. Fitch considers a sequential pay structure consistent with a ‘AAA” rating. Towd Point's acheived 'AAA' ratings with 47% credit enhancemnt.

 

There’s another difference between the collateral of the two deal that arguable make the Citigroup pool of loans less risky. A smaller portion of the loans backing the deal, or 38%, are subject to future payment shock because they have variable rates that have yet to reset. (Roughly 5% are step rate loans with coupons that increase gradually over time and 35% pay only interest for an initial period). By comparison, 67% of adjustable rate mortgages included in the Cerberus transaction. 

Prior to that, in December 2014, Fitch rated a $644 million deal sponsored by Credit Suisse called RPMLT 2014-1 Trust. By some measures, the pool of loans backing this deal was even riskier than either Towd Point or CMLT 2015-1; approximately 21% had experienced a default in the previous 24 months, and roughly 5.6% were still behind on payments. The senior tranche issued by the trust earned a below-investment grade rating of 'BB' from Fitch. Subordination was set at 48.95%.

Citigroup’s deal will issue three subordinate tranches. Fitch expects to assign a 'BBB' rating to the $18 million of class B-1 notes, a ‘BB’ rating to the $4.9 million of class B-2 notes and a ‘B’ rating to the $4.4 million of B-3 notes.

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