New Resi refinancing mortgage strips in ABS market (again)
New Residential is tapping the securitization market to refinance some of the private-label mortgage servicing rights it has acquired from Ocwen.
The $482 million transaction, NRZ Excess Spread-Collateralized Notes 2018-PLS1 is backed by a mix of excess spread, or servicing “strips,” in which New Residential is the servicer and Ocwen is the subservicer and strips in which Ocwen is still both the servicer and the subservicer, because the rights have yet to be transferred over to New Residential.
Ocwen was the original owner of the mortgage servicing rights; it sold the strips - essentially, what is left over after it charges a subservicing fee - to HLSS; HLSS then sold those strips to New Residential.
It’s the second such transaction by New Residential. In 2016, the company completed a $126 million transaction that included some of the same collateral, according to Kevin Dwyer, senior vice president, RMBS, at Morningstar. The 2016 deal has since been repaid.
Aside from the mix of collateral, the big difference between the two transactions is the way they are structured: The 2018-PLS1 securitization trust will issue four classes of notes with ratings ranging from AAA to BBB, as well as unrated tranche. The 2016-PLS1 transaction, by comparison, issued a single tranche of BBB-rated notes.
The new notes can be prepaid in whole or in part at any time; however if they are prepaid before the end of the first 12 months, investors will receive their principal plus all of the interest that would have accrued during that first year. If the notes are prepaid after the first 12 months, investors will only receive their principal and any unpaid, previously accrued interest.
Among the strengths of the deal, according to Morningstar, is the fact that the pool of mortgages on which the servicing rights are based is vast and diversified in terms of geography, remaining term, unpaid principal balance, current FICO score, coupon, and current LTV. Because of this diversification, changes in factors such as interest rates housing prices and other economic conditions should not have the same impact on all mortgage loans, thereby reducing the probability that a majority of mortgage loans will prepay or default within a short amount of time.
Another important consideration is the rate at which the mortgages being serviced are being paid down. In this case, the constant prepayment rate has recently been slightly less than 12%, which includes voluntary and involuntary prepayments (i.e. defaults). However, if any future mortgage regulations result in higher availability of mortgage credit, prepayments may increase and reduce the balance of the reference loan pool, resulting in lessened servicing fees, Morningstar noted in it presale report.
About 23.2% of the reference loan pool is at least 60 days delinquent, which could lead to a high number of future defaults.
Another risk is that investors in the mortgages being serviced could fire Ocwen or New Residential as a servicer; in this case, whoever is appointed to replace them might charge more for subservicing, resulting in less cash flow to holders of the strips. However, Morningstar says that this risk is partially offset by the servicer termination event trigger, which would cause the occurrence of an event of default and require the outstanding balance of the notes to be due in full.