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FirstKey's next 2nd lien RMBS weighs in at over $1B

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FirstKey is marketing its third offering of bonds backed entirely by second-lien mortgages originated before the credit crisis.

At $1.09 billion, this one is more than twice as large as the first two transactions, completed in February 2019 and December 2018.

The collateral for Towd Point Mortgage Trust 2019-SJ2 consists of 26,869 seasoned performing and reperforming loans with an average balance of $40,428, including according to Fitch Ratings. The loans are have a weighted average model credit score of 706.8, sustainable loan to value ratio of of 83.5%, and seasoning of approximately 147 months.

All of the loans are currently making timely payments; 73.8% of them for over two years. Just over a quarter (26.2%) have more recent delinquencies or incomplete pay strings. Of the total pool, 23.5% have received modifications. The average time since loan modification is approximately 58 months.

Over the past five years, reperforming second-lien loans have defaulted at rates similar to those of first-lien loans, and they have prepaid at a faster rate, according to Fitch. The rating agency expects home price growth going forward to be slow relative to the past five years and, consequently, for prepayment rates to slow and default rates to increase for both first- and second-lien loans. This assumption is reflected in its base-case projected default rate for the pool of 15.5%, which is well above recent trend rates.

Fitch expects to assign an AAA to the senior tranche of notes to be issued, which benefits from 49.7% subordination, up from 48% for the February deal but down slightly from 50% for the December deal.

Citigroup is the lead underwriter.

Specialized Loan Servicing (rated ‘RPS2+’ by Fitch) will be the servicer for 80.1% of the loans in the pool and Select Portfolio Servicing, (rated RPS1- by Fitch) will be the servicer for the remaining 19.9%.

The pool is geographically more diverse than most recently rated RPL transactions. 24.3% of the pool is concentrated in California. Los Angeles accounts for the largest MSA concentration (8.6%) of the pool.

Unlike prior TPMT transactions, excess interest cannot be used to sequentially reduce the class principal balance.

Fitch determined that the initial servicing fee of 32 basis points may be insufficient to attract subsequent servicers under a period of poor performance and high delinquencies. In the event that a successor servicer is appointed, the servicing fee can be increased to an amount greater than the cap.

Non-interest-bearing principal forbearance amounts totaling $5.2 million (0.5%) of the unpaid principal balance are outstanding on 762 loans. Fitch included the deferred amounts when calculating the borrower’s loan-to-value ratio and sustainable LTV , despite the lower payment and amounts not being owed during the term of the loan. The inclusion resulted in a higher probability of default than if there were no deferrals. Because deferred amounts are due and payable by the borrower at maturity, Fitch believes that borrower default behavior for these loans will resemble that of the higher LTVs, as exit strategies (that is, sale or refinancing) will be limited relative to those borrowers with more equity in the property.

FirstKey was founded in July 2013 and is beneficially owned by certain funds managed by affiliates of Cerberus. Cerberus is headquartered in New York and has issued, with FirstKey’s involvement, approximately $33 billion in RMBS since 2015, of which $18 billion were U.S. RMBS.

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RMBS Cerberus Capital Management