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In a 1st, FirstKey preps RPL RMBS backed entirely by second liens

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FirstKey's next securitization of reperforming residential mortgages consists entirely of second lien loans, according to rating agency presale reports.

FirstKey, a Cerberus affiliate, has completed a number of deals through its Towd Point platform that were backed by a mix of first- and second-lien mortgages issued before the financial crisis, but this is the first time it has securitized second liens on their own.

Towd Point Mortgage Trust 2018-SJ1 is backed by 12,148 loans with a total principal balance of $484.9 million; the portfolio is approximately 143 months seasoned, and 32.2% of the loans are modified, according to presale reports published by Fitch and DBRS. Within the pool, 582 mortgages have non-interest-bearing deferred amounts, which equate to 2.5% of the total principal balance.

Over the past five years, reperforming second-lien loans have defaulted at a similar rate as reperforming first-year loans, and have prepaid at a higher rate, Fitch noted in its report. Going forward, however, the rating agency expects home price appreciation to slow, which should result in a higher rate of default and slower rate of prepayments. Fitch expects 15% of loans in this transaction to default, in its base-case scenario, which it said is “well above recent trends.”

And when second liens do default, the recoveries are much, much worse. Both Fitch and DBRS expect them to be zero. In fact, DBRS assumes any second lien loan more than 180 days delinquent is charged off and the unpaid principal considered a realized loss.

No surprise, FirstKey is offering considerably higher credit enhancement on the senior notes to be issued. The $242.5 million of Class A-1 notes benefit from 50% subordination consisting of the other tranches of notes to be issued.

By comparison, second liens accounted for just 7.2% of the collateral for FirstKey’s prior deal, completed in October. And the sponsor only offered 42.64% subordination on the AAA-rated super senior tranche of that deal, according to DBRS; a senior support tranche of notes benefited from 28.3% subordination was also rated AAA.

The latest deal has a second senior tranche benefiting from 42.4% subordination that is rated double-A by both DBRS and Fitch.

There is no subordinate floor on the senior tranches of the latest deal, as the junior tranches receive no principal and so are available to absorb losses.

The structure is a traditional sequential-pay structure whereby losses are allocated in reverse-sequential order. Unlike prior TPMT transactions, excess cash flow will not be used to turbo down the senior classes.

Despite the additional risks presented by second liens, both rating agencies cited some mitigating factors. For one, the pool is geographically more diverse than most recently rated nonperforming mortgage transactions, with just a 23.4% concentration in the largest state, California, and just 7.9% in the largest metropolitan statistical area, Los Angeles. (Fitch estimates that roughly 0.34% of the pool is located in areas directly affected by the recent California wildfires, which do not pose a material risk to the transaction.)

Also, the estimated cumulative loan-to-value ratios are relatively robust for a junior lien pool, per DBRS. The combination of loan amortization and home price appreciation has resulted in the CLTV migrating from 90.3% at origination to the 79.4% (as estimated by FirstKey).

And the credit quality of loans with CLTV greater than or equal to 100% is generally robust with an average credit score of 702 and approximately 91.4%, 79.5% and 73.3% of these loans have been 0x30 for at least the past 12 months, 24 months and 36 months, respectively.

DBRS warned, however that the transaction employs a “substantially weak” representations and warranties framework. There are far fewer reps and warranties than in a typical Towd Point securitization, particularly with respect to property condition and property taxes, assessments or other charges that may have priority over the securitized mortgage if they remain unpaid or for which a lien has been recorded.

And similar to previous TPMT transactions, the rep and warranties “sunset,” or expire, after 13 months.

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RMBS Cerberus Capital Management