Latest UK ‘Buy-to-Let’ RMBS Backed by Pre-Crisis Loans

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Capital Home Loans Ltd. (owned by an affiliate of Cerberus Capital Management) is heading to market with its 11th securitization of residential mortgages that were taken out by U.K. landlords prior to the 2008 financial crisis.

Towd Point Mortgage Funding 2017-Auburn 11 is a collateralization of 13,543 loans from 9,262 borrowers, according to Moody’s Investors Service.

The deal has yet to be sized, although the senior Class A-1 notes will comprise 73.25% of the pool.

That tranche as well as another senior class series of Class A-2 notes (5% of the pool) have been assigned preliminary triple-A ratings from Moody’s and three other agencies: Standard & Poor’s, DBRS and Fitch Ratings.

The deal’s joint lead managers are Morgan Stanley, Wells Fargo and Bank of America’s Merrill Lynch International.

The proceeds will be used to fund a portion the purchase of the loans by Cerberus, which acquired £2.25 billion of CHL loans last November from CHL’s prior owner, Irish Permanent Plc. The transaction followed up Cerberus’ July 2015 acquisition of CHL that included an initial purchase of £2.5 billion in outstanding buy-to-let CHL mortgages, as well as a small percentage of loans for owner-occupied properties.

The loans in both purchases have been collateralized in each of CHL’s three prior Auburn platform securitizations, including Auburn 11. The previous transaction last October (Auburn 10) was a £1.24 billion transaction.

CHL no longer originates mortgages, and it was unclear from presale reports if the latest transaction clears its managed portfolio.  

The loans in the pool have an average balance of £183,299, and an extensive seasoning of 9.9 years with 12.7 years of weighted average remaining terms. Nearly all of the loans (97.57%) are interest only loans carrying a weighted average coupon of 1.6%.

With such favorable terms for borrowers (who qualified for the loans based on the property’s rental income, instead of personal income), the default rates have been extraordinarily low for a collection of loans in an RMBS. More than 88% of the loans in the portfolio have never been in arrears, and of 14.2% of loans that have been restructured, 94.2% are current, according to presale reports.

S&P notes that a higher percentage of the loans (34.55%) are “flexible loans,” which in the UK permits borrowers to redraw capital from the loan based on the amount of previous overpayments.

Previous Auburn platform transactions have performed “in line or better” than most other UK buy-to-let securitizations, according to Fitch. The low coupons paid borrowers means a lower default probability on the loans.

Another strength backing the deal is high rental demand for the properties, noted Fitch.

“Given the present state of the mortgage market, it is comparatively difficult for buyers to secure mortgages which might previously have been accessible,” the agency’s presale report stated. “This is primarily due to tighter lending criteria and limited product availability. As a result, households have tended to remain longer in rental agreement(s), increasing the demand for rental properties and leading to an increase in rents by landlords.”

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