Representation & Warranties issues may have had something to do with where JP Morgan’s priced its RMBS deal this week; but its structuring was also to blame.
The JP Morgan deal marks the return of the so-called “Y-structure” where the securitized pool is basically separated at the senior part of the capital structure but then at the bottom shares the same enhancement. JP Morgan declined to comment on the story.
According to one buyside source familiar with the deal, the triple-A notes on JP Morgan’s, J.P. Morgan Mortgage Trust, Series 2013-1 priced at 160 basis points over swaps for the 3.56-year bonds; and 130 basis points for the 3.82-year bonds.
According to the buyside source, the “Y” structure was often used pre-crisis but, “turned out to be a bit of a mess when things went bad.” “Issuers usually do it this way because they think they can get better execution on the two senior legs rather than combining them,” he explained.
The pool for JPMMT 2013-1 is divided into two sub-pools, one consisting almost entirely of 30-year fixed-rate mortgages, the other consisting of a mix of 30-year ARMs with 7 or 10-year fixed periods and 15-year fixed-rate mortgages, according to Kroll Bond Ratings presale report. JPMorgan Chase Bank, National Association originated 48% of the original balance of one of the mortgage pools; First Republic Bank originated 41% of the original balance of the other mortgage pool. Four other originators with less jumbo loan experience also contributed collateral to the pool, but the aggregate amount of collateral originated by these sellers is limited to approximately 11% of the original balance of the mortgage pool.
Structural differences aside, the JP Morgan pricing also reflects investors’ concerns over the loosening up of R&W’s. “The R&Ws in this deal are watered down -- after three years it goes away and on top of that there are limitations on it,” said the buyside source.
This “watering down” of R&Ws in the JP Morgan deal was highlighted in a recent unsolicited comment published by Moody’s Investors Service. The ratings agency said earlier this week that the weaker R&W’s would have earned the notes in the deal less than a ‘AAA’.
By contrast, Moody’s did rate the EverBank RMBS and lauded the deal's “unambiguous” R&W’s, which include an unqualified fraud R&W. EverBank priced its two tranches of triple-A’s from EverBank Mortgage Loan Trust 2013-1, at 135 basis points and 145 basis points; both were issued with an average life maturity of 4.55-years.
Much like the gold standard set in Redwood Trust's R&W’s, Everbank’s R&Ws include a provision that allows for binding arbitration in the event of a dispute between investors and the issuer concerning R&W breaches.
This enforcement mechanism require the loan sellers to sign the binding arbitration agreement so that is there is an issue with the loan; and it’s unclear whether it’s a credit vs. underwriting issue, it goes to arbitration. If it’s decided it’s a credit issue, the issuer eats the loss; if it’s an underwriting issue the seller has to but the loan back.
It’s important to keep in mind that while the R&Ws are tighter in the EverBank deal, JP Morgan still comes out as a stronger issuer than the unrated EverBank.
“As an investor you certainly want the stronger vs. the weaker R& W but you want it from a strong issuing entity as well,” said the buyside source. “Neither one of these deals are a shining example of great investor protection.”
Moody’s noted Everbank’s “limited financial wherewithal to repurchase defective loans” in its presale report and said that the risk was mitigated by third-party due diligence review of the valuations of all the loans in the RMBS pool.
“The majority of reviewed loans conformed with EverBank’s ‘preferred credit profile’,” said Moody’s. “Those loans not conforming to EverBank’s preferred credit profile had a sign-off from second-level underwriters. The reviewed loans that did not meet EverBank’s credit criteria had good compensating factors. Because the TPR findings revealed layered risk in some loans and few loans for which we believed the compensating factors did not offset the additional risk, we increased the ‘Aaa’ loss expectation by 30 basis points to account for such loans.”