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Credit quality of Caliber nonprime RMBS is moving back up

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When Caliber Home Loans decided to go it solo on its subprime mortgage securitization last year, using only loans it originated in-house as collateral, the result was a slight drift downward in several credit metrics.

Now the needle is moving back up.

Beginning with a transaction completed in September 2017, Caliber, an affiliate of Lone Star Fund, stopped using loans originated by Sterling Bank & Trust. At the time, Fitch Rating called attention to a “modest” deterioration in credit quality — one that was offset by a higher percentage of loans that are underwritten to full documentation as well as the higher credit enhancement on the senior classes.

Caliber is now marketing its second deal of the year and the third backed entirely by loans originated in-house, and several credit metrics have improved, according to Fitch. The borrowers behind the $401.6 million deal, COLT 2018-2, have a slightly higher weighted average FICO of 705 (versus 700 for the previous deal); the weighted average loan-to-value ratio (at the time of origination) is down slightly at 78.9 (versus 79.9); and the weighted average debt-to-income ratio is also down slightly at 41.9 (versus 42.3).

The most notable improvement, however, is an increase in the liquid reserves of the borrowers, which has more than doubled since the prior two transactions, to $426,633 from $202,558, according to Fitch.

While Fitch limits the credit it applies to liquid reserves only to cases where they make up 30% or more of the loan balance, the size of the reserves in relation to the outstanding average balances still led to a modest credit to the projected losses.

As with Caliber’s previous two deals, all of the loans backing COLT 2018-2 were underwritten using traditional standards for documenting the borrower’s income and assets — which Fitch notes is far from typical for nonprime mortgage securitizations.

Both Fitch and Morningstar Credit Ratings expect to assign triple-A ratings to the senior tranche of notes to be issued, which benefits from 31.3% credit enhancement. That’s down from 34.1% on the comparable tranche of the previous deal and 40% for the deal completed in December.

There are also five subordinate tranches with ratings ranging from AA to B+, and an unrated tranche of notes.

Approximately 65% of 889 loans in the pool do not meet criteria to qualify for a safe harbor under the ability-to-repay rules, another 25% are rebuttable presumption loans (meaning the borrower can challenge whether the lender has proven that the borrower can repay), and the remainder either meet the criteria for safe harbor or are not subject to ability-to-repay rules (because they finance investment properties).

Approximately 42% of the pool had one or more prior credit events, including foreclosure, bankruptcy, short sale or deed-in-lieu of foreclosure.

Morningstar’s presale report calls attention to the fact that approximately 8.2% of the loans account for about 25.1% of the entire pool balance.

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RMBS Subprime lending