Flagstar Bank is preparing its first private-label offering of bonds backed entirely by loans eligible for sale to Fannie Mae and Freddie Mac.
Flagstar Mortgage Trust 2018-3INV is also the mortgage lender’s first transaction backed entirely by loans on investment properties.
By comparison, the bank’s previous four transactions issued via its FSMT shelf were all backed, at least in part, by loans too large to qualify for sale to either government-sponsored enterprise. And these loans largely financed primary residences, as opposed to investment properties.
The underlying pool of collateral for FSMT 2018-3INV consists of 1,077 fixed-rate, 30-year mortgages with an aggregate principal balance of $329 million, according to rating agency presale reports. Because the loans were all made for investment purposes, they are not subject to the Qualified Mortgage and ability-to-repay rules.
Despite the prime credit characteristics of the pool, including a weighted average credit score of 769 and a weighted average original loan-to-value ratio of 65.5%, rating agencies view the collateral as riskier than prime quality loans financing primary residences. DBRS noted in its presale report that “investment properties have greater default risk and recover more poorly than owner-occupied properties."
Rating agencies also noted that approximately 85% of the borrowers have more than one mortgaged property. And borrowers with three or more mortgages (and a maximum of 10) represent 48.3% of the pool, though they generally show considerable income and liquid reserves, according to DBRS. The weighted average debt-to-income ratio for borrowers with multiple properties is 37.7%, slightly higher than the overall DTI ratio for the entire pool, it wrote.
There is also a subset of 49 borrowers who have multiple mortgage loans, with a maximum of four loans, included in this securitization.
The majority of the loans, 57.8%, were used to purchase homes, while 8.6% were used to refinance in order to lower the interest rate or extend the term, and 33.6% were cash-out refinancings.
Just over half of the properties being financed (53.9%) are single-family homes, roughly a third (29.6%) are two-to-four family homes, and 16.5% are condos or co-ops.
DBRS, Kroll Bond Rating Agency, Moody's Investors Service and Fitch Ratings all expect to assign triple-A ratings to both the super senior tranches of notes to be issued, which benefit from 15% credit enhancement, as well as to the so-called senior support tranches, which benefit from just 12.5% credit enhancement.
JPMorgan Securities and Wells Fargo Securities are the initial purchasers.
