JPMorgan is taking a riskier route for its second jumbo mortgage loan securitization of 2016.
Unlike the bank’s securitization of nonconforming fixed-rate loans in June, the assets backing the $434.1 million residential mortgage-backed bonds issued in J.P. Morgan Mortgage Trust 2016-2 (JPMMT 2016-2) are exclusively adjusted rate mortgages.
They also include a cross-section of loans not meeting qualified mortgage/ability-to-repay safe harbor protections from potential borrower litigation, and are reliant on a number of weaker loan structures like 10-year interest-only loans that make up one-third of the pool, according to a presale report from Moody’s Investors Service.
Still, the jumbo loans were issued to a high-quality borrower base with significant liquid reserves and average weighted current FICO scores of 764, which presents the deal as a prime mortgage securitization to the investor market.
Moody’s on Friday issued preliminary ‘Aaa’ structured finance ratings for four super senior notes totaling $361.1 million atop the 14-tranche structure. Those notes feature 12.5% subordination and carry coupons between 2.49% and 2.87%. The remaining A class notes (with 5.85% credit enhancement subordination) received ‘Aa2’ ratings, while $17.6 million in Class B notes were not rated.
Fitch Ratings issued preliminary 'AAA' ratings on the super senior notes, as well.
The 2016-1 fixed-rate transaction, in contrast, saw the senior notes receiving triple-A ratings from both Moody’s and Fitch.
Like previous JPMMT ARM securitizations, JPMorgan groups the bonds into a shifting interest “y-structure” grouping of loans with five-year introductory rates (5/25) and those with a 7/23 structure, according to Moody’s.
JPMMT 2016-2 features 363 first-lien residential mortgage loans all originated by a single lender – First Republic Bank – with a principal balance of $302.2 million. That compares to April’s issuance of $412 million in notes backed by loans by a widely diverse collection of lenders, including a concentration of the top five comprising of only 64.7% of the collateral for JPMMT 2016-1.
Over $15 million the notes in JPMMT 2016-2 will be retained by the trust for risk-retention purposes.
Moody’s reports the underlying loans are well-seasoned (21 months on average) with strong borrower credit profiles: the weighted average current FICO score is 764 and with weighted average combined loan-to-value ratio is 60% – a significant factor to borrower performance because of the significant amount of equity (and also greatly reduces risk of homeowner association liens that can supersede lender liens in some states due to nonpayment of dues).
First Republic is also considered a strong originator with a lengthy track record in jumbo prime loans. Another plus: nearly 97% of the borrowers have at least two years of liquid reserves.
But the features of the loans themselves are “relatively weak,” noted Moody’s. The presale report stated 32.2% of the loans are interest only for 10 years, and 43.8% have prepayment penalties. Of the borrower pool, 25.7% are self-employed and 24.4% of the pool is comprised of investor properties.
More than 32% of the loans are interest-only for 10 years, and 43.8% include prepayment penalties. Many loans are tied to self-employed homeowners or to investors. In addition, more than a quarter of the pool’s loans do not meet QA/ATR requirements.
The loans also contain large average principal balances ($845,930 for 5/25s, $821,306 for 7/23s), greater than similar individual balances in JPMMT’s last ARM securitization (2015-4). There are also nearly twice as many loans with balances over $1 million.
The loans in the current deal have a heavy concentration of California mortgages, comprising nearly 50% in both groupings.