A newly launched FirstKey Mortgage deal provides investors with RMBS backed by low-leverage loans on properties that are somewhat less overvalued than the nationwide average, although the floating-rate loans originated when interest rates were significantly lower could prove problematic.
The $546 million Towd Point Mortgage Trust 2024-2 offering is split into seven rated tranches, ranging from AAA to B-, according to Fitch Ratings, and three unrated pieces. The bulk of the deal, $516.3 million, is rated AAA, while the three unrated tranches total $3.3 million.
Fitch noted in a Dec. 10 pre-sale report that 84% of the 860 loans in the pool are vulnerable to future payment shock, either because of the underlying adjustable-rate loans or loans currently in an interest-only period, or both.
"As the adjustable-rate loans were originated under low rates and given the current rate environment, the reset could prove meaningful," Fitch said.
Countering that risk, Fitch said, borrowers have strong credit profiles, including a Fitch model FICO score of 769 and debt-to-income of 36%.
"Borrowers' credit profile and very low leverage should mitigate potential defaults arising from a payment shock; however, defaults were still increased by 60% to account for this risk," Fitch said.
Another negative factor impacting ratings, Fitch said, is that the mortgage pool's home prices are 8.6% above a long-term sustainable level, although below the 11.6% home-price overvaluation nationwide and home prices attached to loans in other recent deals.
BofA Securities is the lead underwriter on the current deal, which comprises seasoned first- and second-lien mortgages that are a mix of performing and re-performing loans — the latter performing again after a delinquency period of at least three months — of which 87% are where the borrower maintains a primary residence.
