The portfolio of residential mortgage-backed, pass-through securities within the upcoming deal, TORRENS 2019-2, is considered prime but will have to rely on a number of credit supports to counteract some weaknesses in the underlying loans.
A substantial amount of the loans, 33.9%, were refinanced with equity takeout or for debt consolidation. S&P Global, which rated the deal, noted that level of borrowing against the accumulation of equity presents some additional risk.
For that reason, the TORRENS transaction is relying on note subordination, a low weighted average, current loan-to-value ratio and lenders’ mortgage insurance to boost credit to the notes. The trust will issue five classes of rated notes and a sixth unrated class, totaling A500 million ($345 million).
In the class A notes, TORRENS has 8.0% credit support from note subordination that exceeds the level of credit support in line with an ‘AAA’ rating. Further, the TORRENS portfolio has a weighted average current LTV of about 59.5%, which leads S&P to believe that borrowers might have more equity in their homes and are less likely to default.
In terms of the deal’s lenders’ mortgage insurance, about 16.8% of the mortgage loans within the pool has coverage on the outstanding mortgage principal. The coverage extends to accrued interest, and any reasonable costs related to the defaulted mortgage loans.
The deal has other notable features. The class A notes will have a legal final maturity of May 2051. They can, however, be repaid in full by issuing new pass-through, floating-rate notes, for class A-R, on their refinance date. If the notes are not repaid by that date, the margin could increase by 0.25%.
TORRENS 2019-2 has designated the lower classes to absorb losses in the deal first. Class E will absorb the charge-offs until its outstanding balance reaches zero, then class D, and class C up through the senior class A note, or an A-R class, if issued.
S&P Global has issued preliminary ratings of ‘AAA’ to class A; ‘AA’ to class AB; ‘AA’ to class B; ‘A’ to class C; and ‘BBB’ to class D. Class E, with $3.5 million in notes, is not rated by S&P Global.
