J.P. Morgan is back with its second RMBS this month. The latest transaction, JPMMT 2015-5, pools 506 hybrid adjustable-rate mortgages (hybrid ARMs) totaling $489.6 million.

The 2015-5 features mostly (97%) First Republic-originated mortgages that have adjustable rates at five (30.6%), seven (65.8%) or ten (3.6%) years after the origination. Some 63.1% of the loans are interest-only for first 10 years since origination. The loans all have final 30-year maturity terms.

At the beginning of July the issuer began marketing the JPMMT 2015-4 series, whose pool was primarily 30-year fixed-rate mortgages originated by First Republic.

Moody’s Investor Service assigned preliminary ratings of  ‘Aaa’/‘AAA’ ratings to the class A notes offered under the 2015-5 trust.

However, the notes were rated with higher loss expectations than the issuer’s 2015-4 transaction. That is because loans with adjustable rates are subject to a higher risk of payment shock compared to loans with fixed rates. Moody’s calculates potential losses for the ‘Aaa’ notes at 6.35% compared to 5.00%  for JPMMT 2015-4.

The increased risk of payment shock isn’t the only characteristic of the structure to ratchet up Moody's loss expectations. The rating agency noted in the presale report that the high concentration of loans in the San Francisco area (35%) as well as the significant proportion of interest-only loans (63%) and the presence of many loans with a prepayment penalty (80%) are also a cause for concern.

However, in line with J.P. Morgan previous deals, as well as other post crisis RMBS, the credit quality of the transaction is strong. The borrowers in this transaction have high FICO scores, significant liquid cash reserves and sizeable equity in their properties. The loans are also highly seasoned (weighted average 29 months) and all of the loans have perfect pay histories.

All of the loans are either qualified mortgage (QM) safe harbor loans or are not covered under the Ability-to-Repay Rules (ATR) because they were either originated prior to the rules’ effective date or were non-owner occupied properties.

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