The Mello Warehouse Securitization Trust 2021-2 is preparing a $500 million deal, the latest transaction collateralized by newly originated mortgages that are eligible for purchase by Freddie Mac, Fannie Mae and Ginnie Mae.
First-lien residential mortgages with fixed and adjustable rates are in the pool, which could also include Federal Housing Authority streamline mortgage loans or Veteran Administration loans structured for interest rate reduction refinancing, according to an assessment by Moody’s Investors Service.
The collateral is subject to an ongoing due diligence review to ensure that the mortgages always conform to high quality standards for the duration of the revolving period, Moody’s said.
Mello also features a couple of firm margin requirements to help ensure that notes will be paid off in case of a default. Mortgages purchased for the facility will be marked to market on a daily basis, according to Moody’s, and the repo seller, loanDepot, will cure any increases in margin deficits. This process will increase the likelihood of sufficient collateral in the pool for the indenture trustee to complete a sale of collateral to pay off the notes in full, especially if loanDepot defaults on its obligation to pay off the notes at the end of the facility’s revolving period.
Potential credit weaknesses include a potential gap in the due diligence process. Collateral level reviews are conducted every 180 days, according to Moody’s, so the facility’s collateral quality might not be up to date at all times. A full due diligence review might not be completed before the loans exit the facility. Also, a review is limited and might not examine every aspect of the mortgages.
In another credit risk, the facility is allowed to include, up to 50 percent of the pool, mortgages whose documents have not been delivered to the custodian at the time of inclusion. These so-called wet loans might expose the facility to fraud-related losses during the time that it does not hold the collateral documents.
Moody’s assigned ‘Aaa’ ratings to the $351.2 million Class A notes; ‘Aa’ ratings to the $47.5 million class B notes; and ’A2’ to the $46.2 million Class C notes.
