Invictus Capital Partners is marketing its second offering of residential mortgage bonds backed exclusively by loans on investment properties. The $254.8 million transaction, Verus 2018-INV2, comes to market eight months after the sponsor’s first deal backed exclusively by investor loans in April.
Before the April transaction, Invictus had included some investor loans in its securitizations of nonprime mortgages, but these loans were always a relatively small portion of the overall collateral.
Investor loans are underwritten differently than loans on primary residences, and S&P Global Ratings considers them to be riskier than nonprime loans financing primary residences. Most of the 703 loans backing Verus 2018-INV2 were underwritten using primarily FICO scores and loan-to-value ratios. And a sizable portion, 42% were underwritten using actual or estimated rental income; none used the borrower’s income.
Verus 2018-INV2 was structured so that the AAA-rated notes could sustain losses of 35.85% of the original principal balance of the collateral before investors forgo their own principal. That’s almost 2.0 basis points less than the 37.1% loss coverage requirement for the AAA-rated tranche of the prior deal. But it’s still well above 28.3% for Verus’ most recent offering of bonds backed by primary residences.
Among the notable differences between the two deals backed by investors' loans: The latest deal has significant exposure to cashout refinancings: 45.2% vs 43% for the April deal. On the plus side, borrowers in the latest deal have more equity in their homes. The weighted average current loan-to-value ratio is 61.5%, down from 62.7% for the prior deal. And that’s despite the fact that the average cashout refinancing put $191,457 in the borrower’s pocket, and 86 loans have cashout amounts greater than $200,000.
The latest deal also features higher exposure to foreign national borrowers (11.3%); and higher exposure to two- to four-family housing (20.2%), according to S&P.
The weighted average current FICO score for the collateral pool is 716. S&P assigned a score of 666 on 79 (7.7% by balance) of the foreign 112 borrowers who did not have FICO scores. “We considered the characteristics of the loans in the pool to borrowers with FICOs compared to loans in the pool to borrowers without FICOs,” the presale report states. “Because the underlying borrower profile appears to be relatively homogeneous, we believe assigning an average FICO, minus one standard deviation, reflects the risk of borrowers in this pool lacking FICOs.”
Among other risks, two borrowers (0.28% by balance) have experienced either a bankruptcy discharge or dismissal within 24 months and three borrowers (0.70% by balance) have experienced a foreclosure, short sale, or deed-in-lieu over that time.
Sprout Mortgage contributing 43.3%, and 35 different originators contributing 56.7% of the pool by balance, each of which, make up less than 10.0% of the collateral.
In addition to two AAA-rated tranches, one fixed-rate and one floating-rate, S&P expects to assign ratings ranging from AA to B to five subordinate tranches of notes to be issued.
