EFMT Sponsor LLC has closed a deal comprising $199.4 million in residential mortgage-backed securities (RMBS) that appear to carry few risks apart from the asset class itself, second-lien loans, according to December 16 new issue report by KBRA.
The EFMT 2024-CES1 offering pools 2,427 loans made up entirely of PennyMac Loan Services' newly originated, closed-end second lien mortgages, seasoned approximately four months. The fully amortizing, fixed-rate mortgages hold mostly 20-year and 30-year terms.
KBRA notes that second-lien loans are likely to experience significant losses upon default, even when there is low or no home-price depreciation, because they receive proceeds only after the first-lien holder has been fully repaid.
"Depending on the amount of additional costs advanced during foreclosure, second liens are susceptible to loss severities in excess of 100%," KBRA says.
Other potential credit risks in the deal, however, appear to be minimal. KRBA states that the mortgage borrowers provided income documentation in accordance with Fannie Mae's underwriting guidelines, including one year of income documentation. KBRA also notes the experience of the loans' originator and servicer, PennyMac Mortgage Investment Trust, a publicly listed mortgage REIT, and the "notable geographic diversification" of mortgages.
"The diversity among [core-based statistical areas] in EFMT 2024-CES1 is such that no geographic concentration adjustment was applied to KBRA's expected loss," the rating agency says.
Acting as placement agent on the deal is Armstrong Securities, according to KBRA. The firm's SEC registration was approved in March 2023, according to Finra's BrokerCheck.
