Daiwa Bank has launched a residential mortgage-backed security (RMBS) transaction via special purpose vehicle Maison Capital Corp. Nomura lead managed the 28.97bn transaction, secured on 2907 loans worth 30.28 billion. Daiwa is now considering issuing on a regular basis.
Regular home loans form 6.3% of the portfolio, regular refinance loans form 61.95% of the portfolio, and special refinance loans form 31.75% of the portfolio. Regular refinance loans follow the same underwriting standards as regular loans, while special refinance loans are based on stricter underwriting criteria, but allow for more lenient loan-to-value ratios (LTV).
"What was unique was the fact that Daiwa securitised many refinancing loans," said Yu-Tsung Chang, at Standard and Poor's in Tokyo. "These have to go through stricter underwriting." Refinanced loans became popular in the late 1990s after interest rates fell, and borrowers attempted to lock in lower interest rates.
Borrowers of these loans have to demonstrate higher debt-to-income levels than under normal lending practices, and cannot have been delinquent in making payments on their initial loan. The deal has six tranches:
*A1 18.1bn AAA (S&P)
*A2 7bn AAA (S&P)
*A3 3bn AAA (S&P)
*B 500m A (S&P)
*C 370m BBB (S&P)
Daiwa purchased the unrated class D tranche. Final legal maturity is November 2015. Daiwa Guarantee Corp covered the full amount of outstanding principal on each mortgage for all the notes.
Negative carry may occur if mortgage rates are fixed below the sum of the weighted average coupon and transaction expenses. Negative carry could also occur if the mortgages are converted to floating rates while short term prime rates plus the margin, are below the note coupon and transaction expenses. However Chang said: "The risk is that interest rates will go down further and stay there for an extended period of time. Given the current interest rate environment, there is not much room for interest rates to go down further, and to stay there for the life of the deal."
However, if rates go up they will create excess yield because the mortgage yield will increase while the note coupon is fixed.
Recently there has been a large increase in Japanese issuance volumes of RMBS. Chang explained that it is uncertain whether it will rise further as many banks are issuing RMBS on an experimental basis.
The recession in Japan could also have an impact on deals. "If the economy is not doing well it could impact default frequency," said Chang, "and it could also impact the loss severity due to depressed real estate market." - ISR
