Neuberger Berman, an asset manager that has become a regular issuer of bonds backed by nonperforming and rehabbed residential mortgages, is readying its first deal backed by newly originated loans to borrowers with less-than-perfect credit.
The $485 million transaction, HOF I 2018-1, is the first sponsored by HOF I LP, an Neuberger Berman affiliate formed in November 2017, according to Kroll Bond Rating Agency.
The bulk of the collateral, 59.6%, was acquired from Impac Mortgage Corp., a lender with a long track record; the remainder, 40.4%, from Sprout Mortgage Corp., a relative newcomer.
Among the notable risks to the deal, according to Kroll, is the large number of loans (66.4%) that use methods other than tax returns or profit and loss statements to verify borrower income – typically bank statements. Approximately 53.9% of the loans had 12 months of bank statements, and 9.1% had bank statements ranging from 13 up to 27 periods.
Typically, so-called bank statement loans require more borrower equity and/or better credit history than loans to borrowers who fully document their income, Kroll notes. “By contrast, the bank statement loans in HOF I 2018-1 have a WA LTV and WA CLTV that exceed those of the other collateral subsets within the pool, including those with full income documentation.”
Another 22.6% are business purpose loans for one- to four-unit rental properties that generally are not eligible to be purchased by Fannie Mae or Freddie Mac, typically due to a lack of borrower income documentation or other unallowable investor attributes, such as having more than a specified number of financed properties.
Kroll classified another 11% as “expanded prime,” or loans that would typically require exceptions to prime/super-prime guidelines with compensating factors. These loans can have credit scores as low as 600, debt-to-income ratios as high as 50% or more, and loan-to-value ratios above 80-85%.
A smaller subset of loans are classified as nonprime due to certain loan or borrower characteristics, including borrowers with blemished credit history and foreign national borrowers.
On the plus side, the exposure to California, at 46.5%, is “moderate” compared with other securitizations of loans not eligible for sale to Fannie and Freddie, according to Kroll.
However, the rep warranty and enforcement framework available to investors in HOF I 2018-1 is “modestly weaker” than industry standards considering the relatively higher credit risk of the underlying collateral and the R&W provider. All of the rep and warranties are in effect for the life of the loan. However, the initial determination of a rep and warranty breach will be made by the sponsor, there will be no automatic review of loans that become delinquent, and loans will not be repurchased until they become 60 days behind on payments during the first three payments after origination – all of which lessens the effectiveness of the rep and warranties.
Kroll expects to assign an AAA rating to the senior tranche of notes to be issued, which benefit from 29.95% credit enhancement. It will assign ratings to five tranches of subordinate notes rating from AA to B.
While Neuberger Berman’s current strategy of acquiring non-QM loans is relatively recent, the firm’s experience managing client exposure to residential mortgage assets spans more than two decades, according to Kroll. Since 2012, the firm has directly acquired over 30,000 mortgage loans and manages over $15 billion in residential mortgage assets. It has issued 19 reperforming/nonperforming transactions since 2014.
