Morgan Stanley plans to issue $256.5 million in bonds backed 291 residential mortgages that were all originated by First Republic Bank.

In a departure from recent RMBS deals, where the issuer retains the subordinate notes at closing, Morgan Stanley does not plan to purchase any portion of the capital structure and is will not retain any of the credit risk associated with the transaction other than that associated with the reps and warranties. 

Fitch Ratings said in a presale report that this lack of direct credit risk retention is a negative to the transaction’s overall structure. “Credit risk retention ensures a strong incentive to limit loan losses due to both credit events and misrepresentation and helps better align the interests of the mortgage loan sellers with non-affiliated bondholders,” said the ratings agency.

The deal would also be subject to risk retention under the qualified residential mortgage (QRM) rule, proposed by the major financial regulators, which would require RMBS issuers  to retain risk in transactions with non-QM loans, giving them “skin in the game,” but not those that are pure QM. The regulators reproposed the rule last fall, permitting issuers to retain either 5% of the most subordinate portion of the RMBS deal, or a 5% “vertical slice,” from the triple-A tranche down through the unrated portions.

Only 43 loans in the Morgan Stanley pool were taken out after Jan. 10, 2014 or later and are designated as safe harbor, qualified mortgages. There were an additional eight  loans made on investment properties with application dates of Jan. 10, 2014 or later, which are not subject to the qualified mortgage rule since they were made for business purposes, according to Fitch.  

However the loan credit quality, the high percentage of due diligence and the quality of First Republic Bank’s origination platform are partial mitigants to this risk in this transaction.

All of the loans in the pool are seven-year, hybrid adjustable-rate mortgages (ARMs) made to borrowers with strong credit profiles, low leverage, and substantial liquid reserves. According to the presale report, the original weighted average loan-to-value ratio (LTV) of the pool is 63.3%; 21.7% of the loans have second liens, the original weighted average LTV for the loans with second liens is only 59.9% and the maximum LTV for any loan is 80.0%. All mortgages in this pool are in the first lien position.

Roughly two-thirds of the loans (63%) will pay interest only over a 10-year period while the remaining 37% are fully amortizing. FRB will retain servicing on 100% of the transaction and Wells Fargo Bank will act as master servicer.

The borrowers have a weighted average original FICO score of 771, and 45.2% of the borrowers have original FICO scores at or above 780.  

Fitch will rate six classes of notes will be issued from the securitization trust, Morgan Stanley Residential Mortgage Loan Trust 2014-1. The class A2 and A3 notes, which total $229.29 million, will be rated ‘AAA’ and have credit enhancement at 19.54% and 10.60% respectively.

Five tranches of junior notes will be issued that total $27 million. Fitch expects to rate the class B1 notes, with credit enhancement at 7.35%, ‘AA’; the class B2 notes with credit enhancement at 4.55%, ‘A’; the class B3 notes with credit enhancement at 2.65%, ‘BBB’; and the class B4 notes with credit enhancement at 1.65%, ‘BB’. The class B-5 notes will not be rated.

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