Caliber Homes Loans has achieved its first triple-A ratings for a subprime residential mortgage securitization in just its third asset-backed transaction since launching its platform this summer.
The $225.75 million COLT 2016-3 Mortgage Loan Trust was assigned ‘AAA’ ratings on its $129.9 million Class A tranche of notes that are secured by non-prime jumbo alternative mortgages or home loans to high-risk credit borrowers.
The rating bests the ‘A’ ratings cap that Fitch Ratings and DBRS enforced for the fledgling COLT platform’s A-Class notes in prior deals in June and August.
Fitch explained in a presale report that the agency had “become more comfortable” with the issuer’s operations and due-diligence efforts, as well as the early performance trends (featuring almost negligible levels of losses) on its loans first issued in the fourth quarter of 2014.
“Fitch views the overall credit risk of this mortgage pool as better than 2016-2 due to the compensating factors of higher credit scores [average FICO of 712], lower loan-to-values, higher liquid reserves and higher retail channel origination,” the agency stated in its report issued Wednesday.
The Class A notes were also supported by a higher credit enhancement level of 42.45%, compared to the 40% from August’s transaction, as well as a faster principal distribution and performance triggers to accelerate payment priority features.
Fitch also gave added weight to the loans’ issuance in higher property-value areas like California and Florida, the top two states in the geographic mix. For the first time in an alt-A RMBS transaction, Fitch also chose to give more weight to the median property value of a surrounding area to an individual property loan’s valuation in determining default probability risk.
Over 93% of the loans were issued through alternative lending programs by Caliber (71% of the pool’s 474 loans) and Sterling Bank & Trust (22.1%), similar to the two previous COLT transactions. Caliber is a subsidiary of asset manager Lone Star Funds.
Caliber’s loan performance since it began originating loans in the fourth quarter of 2014 has rounded into a satisfactory record to analysts: of 1,621 mortgages originated to date, only 32 were more than 30 days late (all subsequently self-cured); four were 60 days late and only 2 have been delinquent over 90 days.
Although subprime mortgages still carry a reputation of instability and high-risk, DBRS notes in its presale also issued Wednesday that underwriting standards have improved “significantly” from the pre-crisis era.
“In addition, voluntary prepayment rates have been relatively high, as these borrowers tend to credit cure and refinance into lower-cost mortgages.”
All of Caliber's loans required tax forms, pay stubs, employment verification and the use of bank statements or deposit verification to finalize closing funds and reserves.
The 112 loans issued by Sterling and another lender in in pool, Lendsure (with 7% of the pool collateral) relied on bank statement verifications. That percentage was higher than in COLT's 2016-2 transaction, a deal that Moody's last week pointed to as example of heightened risk for subprime RMBS investors due to that alternative verification as a source for potential income fraud and an inadequate measure of borrower repayment capacity.
Sterling's lending program is strictly for borrowers with strong credit profiles, no delinquencies for 12 months and at least minimum equity investment of 35% in their properties.
Sterling has reported no delinquencies since October 2011 and its servicing portfolio has a low delinquency rate of just 0.06% as of October 2016. The Sterling loans have limited documentation, but are made to borrowers with both strong credit profiles and significant equity to the table.
Caliber issues its alternative loans through five programs targeting borrowers who generally do not meet standards for agency, government or private-label non-agency prime jumbo products. Programs also serve clients rehabbing credit histories through its fresh start or “homeowners access” products.
Over 61% of the pool’s loans are considered non-qualified under Consumer Financial Protection Bureau underwriting and disclosure guidelines, which shield lenders with legal and liability claims from consumers. However, all of the loans do adhere to the CFPB’s ability-to-repay requirements.
The loans are a mix of fixed- and adjustable-rate, prime and non-prime first-lien residential mortgages with average LTVs of 75%. he average loan balance is $476,257, with a weighted average coupon of 6.44%. The average borrower income is $321,565, with average liquid reserves of $151,103.
Caliber and Sterling will be required to carry servicer advances through six months of any individual loan delinquency. With both lenders standing as unrated entities that could experience difficulty funding servicer advances to bondholders, the deal structure includes Wells Fargo as a master servicer.