A pool of 622 mortgage loans extended to borrowers with moderate credit profiles will back a $234.2 million securitization of residential mortgage-backed certificates from the Spruce Hill Mortgage Loan Trust, 2022-SH1.
A majority of the loans, 55.8%, are considered nonqualified mortgages, while 0.35% are considered safe harbor home loans, but QM rules do not apply to the rest of the pool, according to a pre-sale report from Fitch Ratings. Just 11.9% of the loans were underwritten to full documentation standards, while 45.4% of the pool approvals relied on bank statement documentation, according to Fitch.
Spruce Hill, 2022-SH1, is aiming to raise the capital in an environment where the mortgage industry itself is under pressure from lackluster earnings, slowing business and layoffs.
In one particular rating negative, some 53% of the loans in the pool are debt service coverage ratio products. These loans were originated for business purposes, and are likely to fund the 43.8% of investor properties in the pool. Those borrowers qualified for the mortgages on a cash flow basis, rather than a debt-to-income underwriting standard, and borrower income and employment were not verified in the loan approval process.
Fitch set its expected losses for those loans to 27% in the 'AAA' stress scenario, which is driving the higher losses in the pool, the rating agency said.
Still Spruce Hill, 2022-SH1, has a capital structure with a more mixed credit outlook, according to the rating agencies. The trust will repay the notes on a combined pro-rata and sequential basis, where the fixed-rate super senior, senior support and the senior notes will be repaid on a pro rata basis, and the trust will repay the subordinate notes sequentially, according to Kroll Bond Rating Agency.
On a weighted average (WA) basis, the loans have an original 360-month term, have an original loan-to-value ratio of 67.9%, a model FICO score of 725 and original debt-to-income (DTI) of 44.4.
As for underlying borrowers' use of the proceeds, 54.2% of borrowers will funds a primary residence, while investor properties account for 43.8% of the loans, the rating agency said. Some 37.4% of the loan proceeds are for purchases, while 51.1% are cash-out loans. None of the loans are under modification agreements, according to Fitch. Carrington Mortgage Services originated the loans—which have an average balance of $376,252—and will also service them, according to Fitch.
Fitch expects to assign ratings of 'AAA' through 'A' on the more senior notes; 'BBB' on the mezzanine M-1 class and 'BB' through 'B' on the B-1 and B-2 notes. For its part KBRA expects to assign 'AAA' to the A-1A and A1B notes; 'AA+' and 'A' to the A-2 and A-3 notes; 'BBB-' to the M-1 notes; and 'BB' and 'B' to the B-1 and B-2 notes.
