Flagstar's next RMBS backed by fewer conforming mortgages
Flagstar’s next offering of residential mortgage bonds is backed by a smaller proportion of conforming mortgages than its previous transaction, according to rating agency presale reports. This makes the deal slightly riskier, leading Flagstar to increase the credit enhancement.
The $487 million FSMT 2018-5 is backed by 726 fully amortizing fixed-rate mortgages with original terms to maturity of primarily 30 years. Approximately 33.2% of the loans are eligible to be sold to Fannie Mae or Freddie Mac; that’s down from 52% in FSMT 2018-4.
Nevertheless, the credit characteristics of the pool are generally consistent with those of recent prime transactions by Flagstar and others. The pool has a weighted average original FICO score of 763 and an original combined loan-to-value ratio of 69.7%.
Moreover, borrowers in the pool have liquid reserves, on a weighted average basis, that are higher than Flagstar’s prior deal: $228,000 vs. $189,000. And a larger percentage of the loans were used to purchase homes, rather than refinance them or acquire investment properties: 65.5% vs. 58%.
Fitch Ratings, DBRS and Kroll Bond Rating Agency all expect to assign triple-A ratings to the super senior notes, which benefit from 15% credit support, on par with the super senior notes of FSMT 2018-4 and FSMT 2018-2. (Flagstar’s third deal of the year was backed entirely by loans to investors, and the senior notes had higher credit enhancement to account for the increased risk of these loans.)
However, Flagstar is boosting the credit enhancement on the senior support notes, to 6.5% from 6.25% for the comparable tranches of FSMT 2018-4 and FSMT 2018-2. This tranche has preliminary triple-A ratings from Kroll and DBRS but Fitch only expects to rate it AA+.
And only Kroll and DBRS are rating the subordinate tranches of notes.
Merrill Lynch, Pierce, Fenner & Smith and Wells Fargo Securities are the underwriters.
The new transaction is also notable for the introduction of a variable servicing fee that both Kroll and DBRS say will result in lower costs — and higher interest payments to noteholders — so long as the loans in the collateral pool are performing well. There is a flat base fee of $20.50 per loan that is substantially lower than the typical flat fee of 25 basis points for typical prime loan securitizations. However, when borrowers stop making timely payments, Flagstar, in its role as servicer receives additional fees designed to be aligned with the additional expenses of servicing the loans.
DBRS calls attention to a servicing fee structure it says is unique to this transaction. The fee has three separate components: the base servicing fee, the aggregate delinquent servicing fee and the aggregate incentive servicing fee. These fees vary based on the delinquency status of the related loan and will be paid from interest collections before distribution to the securities.
Kroll also notes in its presale report that Flagstar’s latest deal is the first to include a new product called “non-agency jumbo express” that accounts for 12% of the pool of collateral. This product uses automated underwriting and guidelines for conventional mortgages, applying them to loans that are too large to qualify for purchase by Fannie or Freddie.