JP Morgan is returning to the private residential mortgage backed securities market for the first time since the financial crisis with a $616 million deal, according to rating agency presale reports.
The deal, J.P. Morgan Mortgage Trust, Series 2013-1, is backed by 752 prime loans originated primarily by J.P. Morgan Chase Bank and First Republic Bank with a total balance of approximately $616.3 million.
The deal is being launched weeks after two rating agencies, Fitch Ratings and Moody's Investors Service, published special reports critical of proposals they had reviewed for RMBS. The reports, which did not name JP Morgan or any other prospective deal sponsor, said the representations and warranties underlying the structures of proposed deals were weaker than the ones animating the deals issued by Redwood Trust off its Sequoia Mortgage Trust Shelf.
JPMMT 2013-1 was able to garner provisional 'AAA' ratings for its senior tranches from both Fitch and Kroll Bond Ratings, despite having rep and warranties that both rating agencies characterized as "weak." But the top rating came at the expense of providing additional credit enhancement. The $244.4 million class 1-A-1 and the $326.6 million class 2-A-1, both rated 'AAA,' benefit from credit enhancement of 7.4%.
By comparison, the senior tranches of Redwood's most recent RMBS have credit enhancement of 6.25%.
That means JP Morgan was able to issue less senior certificates, as a percentage of the total deal, than the Sequoia transactions, because they needed more subordination underneath the triple-A class, according to Michele Patterson, a senior director in Fitch's RMBS group.
She described the difference as "notable."
Rui Pereira, who heads Fitch's RMBS group, said the rep and warranty framework was a key factor behind differential between credit enhancement on this deal and others the agency has rated. "We spent a lot of time analyzing this transaction," he said in a telephone interview.
Kroll also cited weak rep and warranties as a credit concern in its presale report, but it said the high quality of the collateral was a mitigant.
"If similar provisions were present in a transaction that had lower quality collateral, was subjected to less robust third party diligence review or had a higher proportion of originators that were potentially financially weaker, KBRA might forecast higher expected loss levels or consider a downward adjustment of its ratings," the agency said in its report.