FirstKey’s next offering of reperforming residential mortgage bonds features higher exposure to a type of property rarely securitized since the financial crisis: mobile homes.
Manufactured housing accounts for approximately 4.8% of the $1.56 billion balance of the collateral pool, according to rating agency presale reports. FirstKey has included mobile home loans in its past seven transactions, but they accounted for just 1.5% of the collateral for the sponsor’s previous transaction, completed in February; exposure to deals completed in 2017 never exceeded 1%.
The new transaction, Towd Point Mortgage Trust 2018-2, also features higher exposure to loans on investment properties, which account for 6.6% of the collateral. That’s up from 2.7% of the collateral for the prior deal, but still down from 7.8% of FirstKey’s final RMBS of 2017. Notably, however, 3.5% of the pool, by balance, is loans backed by multiple investor properties, and in some cases the investor properties backing a single loan are located in more than one state, according to Moody’s Investors Service.
Moody’s notes that a subset of these loans were underwritten to commercial standards, which means there is little information about the financial and operational wherewithal of the borrowers.
“Given the lack of transparency to the underwriting standards, as well as the financial and operational wherewithal of these single-family rental operators, we assumed 100% default probability for these 18 loans with 35% loss severity,” the rating agency states in its presale report.
In addition, there are five loans in the pool that are backed by empty lots. Since, these loans only represent less than 1% of the total pool, Moody’s did not assess additional penalty, however.
DBRS calls attention to a weakening of the representations and warranties framework, which it says is weaker than that of previous Towd Point transactions. That’s because the sponsor has introduced a pool-level trigger for reviewing loans. It also notes that the reserve account for loans that breach reps and warranties will be unfunded on the closing date.
However, the rating agency takes some comfort from the fact that the 18 prior transactions issued from the Towd Point platform since 2015 have never had to put a loan back to the sponsor as the result of a rep and warranty breach.
Also, the portfolio has had significant loan seasoning and relatively clean performance history in the recent past. Similar to other recent Towd Point transactions, the portfolio is approximately 141 months seasoned and contains 80.1% modified loans. The modifications happened more than two years ago for 76.4% of the modified loans. Within the pool, 3,888 mortgages have non-interest-bearing deferred amounts, which equate to 11.4% of the total principal balance.
Both Moody’s and DBRS expect to assign triple-A ratings to the senior tranches of notes to be issued, which benefit from 39.5% subordination.
