Surprising no one, Moody’s Investors Service today weighed in on the first post-crisis residential mortgage-backed security (RMBS) from JPMorgan Chase Bank.
And it’s not impressed.
The agency said the $616-million deal would “likely” not hit a triple-A were the agency to rate it. As it stands, the deal has earned provisional triple-A ratings from Fitch Ratings and Kroll bond Ratings.
Moody’s as well as Fitch published reports in early March that read as cautionary tales about the weaker representations and warranties (R&W) that they were seeing in RMBS proposals. Outside reports had linked these comments to a then upcoming JP Morgan deal. The R&W referred to the condition of the underlying loans.
In today’s commentary, Moody’s cited the weak R&W and a “restrictive enforcement mechanism” as tipping the deal away from triple-A terrain. Also hurting the deal’s creditworthiness was the decision to have neither JPM nor any of its affiliates retain any of the credit risk. “These factors combine to create a lack of alignment between the originators and investors in the transaction,” Moody’s said.
The agency added that provided the transaction had an adequate pre-closing third-party review, Moody’s would rate it at the most between ‘Aa1 (sf)’ and ‘Aa3 (sf).”
The only way it could achieve triple-A would be for some alignment of investor and issuer interests that would mitigate the weak framework of R&W. The agency said under the current structure, the issuers could avoid buying back defective loans.
The bar for breaching R&W in the deal is higher than in pre-crisis RMBS, the agency said. In addition, some of key R&W expire, including all of the ones dealing with originator fraud.
All the same, the agency recognized certain strengths in the deal, such as the fact that the collateral consists of high quality loans with low LTVs and high borrower credit scores. The originators are JP Morgan and First Republic Bank.