JPMorgan is turning to the credit-risk transfer securitization model in a new $757.2 million securitization of prime-quality residential mortgages that it will retain on its books.
According to Fitch Ratings, Chase Mortgage Reference Notes 2019-CL1 is Chase’s first synthetic credit-linked note transaction, although it follows in the footsteps of two earlier post-crisis deals sponsored by Chase aimed at reinvigorating the private-label residential mortgage-backed securities market.
Chase 2019-CL1 will be structured to sell notes that are tied to a reference pool of 979 residential mortgage loans – all of which will remain on JPMorgan’s books rather than being transferred to a trust.
Fitch is not rating the Class A-1R notes totaling $697.6 million, but assigned ratings to five classes of mezzanine notes, including a $35.9 million Class M-1 tranche at AA.
The model will be able to expand the investor base for the notes, as well as potentially give JPMorgan a way to receive favorable capital treatment while maintaining prime-mortgage assets on its books, according to analysts.
The transaction is similar to the GSE credit-risk transfer platforms – Fannie Mae’s Connecticut Avenue Series and Freddie Mac’s Structured Agency Credit Risk program – JPMorgan will make payments on the CL1 transaction to the note holders based on the interest rate on the CL1 notes and principal payments are determined based on the actual principal payments received and performance of the reference pool.
This differs from the CAS and STACR transactions, that rely on funding sitting in a custodial account to pay interest and principal on the GSEs’ notes.
“The highest rating achievable will be linked to [JPMorgan], as well as the credit enhancement required through subordination,” said Susan Hosterman, a Fitch analyst. The notes are general unsecured obligations of JP Morgan, which Fitch currently rates AA.
Hosterman noted that JPMorgan has active in structuring transactions aimed at re-invigorating the private RMBS market, which has remained moribund since the housing crisis in 2007 and the ensuring financial crisis. For example, it launched its L Street Securities credit-risk transfer deal in 2014, and in 2016 the Safe Harbor CMT transactions, which aimed to comply with the conditions set forth in the Federal Deposit Insurance Corp.’s Safe Harbor Rule.
“Some investors may not be comfortable investing in [private] RMBS, but this allows them to invest in RMBS collateral without investing in a securitization,” Hosterman said.
An advantage for JPMorgan holding the loans instead of transferring to trust means the bank can “repo” the loans to the Federal Home Loan Bank.
She said that other banks may follow suit, and given the credit linkage to the bank of such transactions, it most likely would be higher quality banks with investment-grade issuer default ratings. She added that the structure could also be used for qualified-mortgage loans, and could potentially be extended to other asset types, such as auto, student or re-performing loans.
She said regulators potentially could permit JPMorgan and other banks to hold less capital against the mortgage pools on their books. Hosterman noted that the bank sought capital relief from the CMT transactions and the regulators were “pretty quick” to let the bank know whether it qualified, adding that the bank ultimately did not get the thumbs up.
JPMorgan declined to comment on the story.
The Fitch presale report noted that key rating drivers include the very high credit quality of the pooled mortgages, which comprise 30-year, fixed-rate fully amortizing loans seasoned approximately 48 months. All the loans were originated through the bank’s or its correspondents’ retail channels, and borrowers in the pool have strong credit profiles, with FICO scores of 773 and low combined loan-to-value ratios of 70%.
