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JPMorgan's next RMBS backed by prime jumbo ARMs

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JPMorgan Chase’s fifth private-label mortgage securitization of the year is backed by prime jumbo loans, all of which have 30-year terms and pay adjustable rates of interest after an initial period of either five, seven or 10 years.

That’s an about-face from the bank’s previous transaction, completed in October, which was backed by fixed-rate mortgages, nearly half of which were underwritten to standards for purchase by Fannie Mae or Freddie Mac.

JPMorgan Mortgage Trust 2017-5 is backed by 705 loans with a total balance of $671 million. The average balance of the pool is $952,747 which is one of the highest in the prime jumbo space, according to Moody’s Investors Service.

The sponsor purchased 58% of the loans from a single originator, First Republic; the remainder was originated by 32 smaller and regional entities that Moody’s believes lack the sophistication of larger more established originators.

Transaction strengths include the prime jumbo borrowers' high FICO, low loan-to-value ratios, high incomes (average $42,902/month) and reserves (average $1.2 million), all of which have been verified.

Transaction weaknesses include the fact that all of the loans have interest rates that reset, potentially resulting in payment shock for borrowers, while 54.5% have characteristics such as periods in which the borrowers pay only interest, and no principal (47.5%), or are self-employed (31.6%), that put them out of compliance with rules designed to ensure that borrowers will be able to repay. Moody’s cited this layering of the two risks as a particular concern.

Fitch Ratings' presale states that a larger proportion, 68% of the loans are interest-only. It says another 22% have "minor" issues related to documentation of borrower income. Another 7% had debt-to-income ratios in excess of 43%, while 2% exceeded the points and fees cap for meeting non-QM.

The higher loan balance of loans in JPMMT 2017-5 is attributable to the greater amount of properties located in high-cost areas, such as the metro areas of Los Angeles, San Francisco and New York. While that is typical of prime jumbo mortgage securitizations, this pool contains a number of loans with very high principal balances, which exposes the transaction to the risk of losses at the tail of the transaction, when few loans remain. At that time, a default of a large loan would significantly reduce enhancement and result in losses to the bonds. The largest 20 loans make up approximately 7.6% of the total balance.

The loans are either serviced by First Republic Bank (58.34%), Shellpoint Mortgage Servicing (38.98%), or PHH Mortgage (2.68%).

Both Moody’s and Fitch expects to assign triple A rating to the senior tranches of notes to be issued in the transaction, which benefit from the subordination of 12% of the securities to be issued.

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RMBS Underwriting Private-label Jumbo mortgages JPMorgan Chase Fitch Fannie Mae Freddie Mac