J.P. Morgan Chase is preparing one of the largest private label mortgage securitizations since the financial crisis. It is backed by a pool of over 6,000 loans totaling nearly $1.9 billion.
But size isn’t the only thing notable about the transaction, dubbed Chase Mortgage Trust 2016-1. According to Fitch Ratings and Moody’s Investors Service, which are both rating the deal, it may be the first issued under the Federal Deposit Insurance Corp.'s (FDIC) securitization safe harbor rule that went into effect September 30, 2010.
Most private label residential mortgage securitizations are structured as legal "true sales" from the sponsor to the securitization trust in order to make put the loans out of reach of the sponsor’s creditors should it become insolvent. Instead, this transaction has been structured in accordance with the safe harbor rule to mitigate the risk of the FDIC's exercise of its repudiation power should the regulator becomes the receiver or conservator of JPMorgan Chase Bank.
The deal’s collateral is also highly unusual. Just one quarter of the loans are the jumbo loans typically found in private-label deals; the remaining three quarters are conforming loans that could be sold to either Fannie Mae or Freddie Mac. All of the loans are prime quality, fixed-rate, fully amortizing first-liens originated by Chase, which also acts as the deal’s servicer.
The safe harbor rule requires several features unique to post crisis deals that Fitch and Moody’s believe will benefit investors. J.P. Morgan Chase must retain 5% of each tranche of notes to be issued by the trust, which aligns its incentive with those of investors in the transaction.
There is also a maximum of six tranches, though the senior class can be time-tranched. Payments of principal are prorated to all six tranches, though there are multiple performance triggers that, redirect more cash to the senior notes should performance of the collateral deteriorate.
The senior, $1.65 billion tranche is provisionally rated triple-A by Fitch and Moody’s; it benefits from credit enhancement of 12.25%; there are also four mezzanine tranches with ratings ranging from double-A-minus to double-B, and an unrated tranche at the bottom of the capital stack.
Servicing is subject to specific rules governing loss mitigation, advancing, compensation and disclosure. Notably, the deal’s servicer will not advance principal or interest payments to noteholders should the underlying loans become delinquent.
The loan seller must provide additional representations regarding underwriting compliance with supervisory guidance and there must be a 5% reserve fund for repurchases for the first 12 months of the deal.
Additionally, rating agency compensation is tied to rating performance.