Caliber Home Loan’s second securitization of nonprime residential mortgages is receiving more favorable ratings agency treatment with the inclusion of higher-quality loans from a third-party originator.
While the provisional ratings assigned Tuesday by Fitch Ratings and DBRS to the $216.7 million COLT 2016-2 match that of the company’s first nonprime RMBS in June, projected loan losses are reduced and the new deal is seen as an improvement under the Consumer Financial Protection Bureau’s “ability to repay” standards.
Fitch and DBRS each assigned early ‘A’ structured finance ratings on the senior Class A-1 notes sized at $130.8 million, with 40% credit enhancement (which is below the 44.7% threshold of the first COLT deal). The Class A-2 certificates totaling $59.67 million have a preliminary ‘BBB’ rating, while a subordinate $8.97 million slice of notes (Class M-1) are rated ‘BB’.
The COLT trust will retain $18.33 million in unrated notes as part to share “skin-in-the-game” risk with investors.
Fitch assessed the deal based on its ‘Alt-A’ mortgage securitization ratings model, due to the limited non-prime securitization history in the post-crisis market and that of both Caliber and asset manager Hudson Americas L.P.
Caliber’s earlier deal was collateralized entirely by its own loan originations, but the new transaction includes loans with strong equity levels issued by Sterling Bank & Trust, a Los Angeles-based stock savings bank catering to wealthy Asian investors purchasing single-family and multi-family housing in the San Francisco area.
Fifty-eight of the 67 Sterling homes are underwritten solely with stated income verification – making them technically non-qualified to meet the CFPB documentation standards – but are believed by the bank to meet the “reasonable and good faith requirements” of ability to repay assessments under CFPB because of the large down payments the bank enforces and its history of no defaults since the program launched in 2011, according to Fitch.
Sterling issues loans up to $2 million that require a 35% down payment; loans between $2 million and $4 million require 40%.
The 67 Sterling loans comprise about 15% of the 501 loan pool.
Nearly all the Caliber loans in COLT 2016-2 are included in the pool are tied to borrowers classified as nonprime either due to previous credit issues, jumbo loans in excess of GSE guarantee limits, interest-only loans, or high debt-to-income or loan-to-value levels.
The Sterling loans have an average FICO score of 760 that outstrips that of the average 701 borrower score of Caliber’s loans.
Fitch applied a loan-loss, probability of default penalty of 1.4x to the Sterling loans because of the non-standard income documentation, resulting in a loss projection of 7.6% for those loans and 16.7% for the pool as a whole. In COLT 2016-1, the Caliber-only loans carried a projected loss of 19.55%.
Another factor in the lower loss projections are the fewer amount of loans assessed a higher risk of potential claims resulting from an ability-to-repay violation. In 2016-1, Fitch doubled the standard ATR claim probability to pool’s loans because of the untested nonprime structure; the new deal has the standard ATR claim applied to 80% of the loans that all meet income (over $100,000 annually), Appendix Q qualification, and FICO scores over 700.
Fitch points out the underwriting criteria of the nonprime loans in both COLT transactions are “significantly” improved from pre-crisis qualification standards.