Oaktree Capital Management is marketing its first offering of U.S. residential mortgage bonds.
The company is an active issuer of collateralized loan obligations, but has to date only issued bonds backed by U.K. mortgages. It only began aggregating U.S. mortgages for securitization last year, according to Morningstar Credit Ratings.
The collateral for the $268 million Bunker Hill Loan Depositary Trust 2019-1 was originated by Sterling Bank and Trust (58.1% of the balance), Citadel (23.1%) and other originators (18.8%). Approximately 42.3% of the mortgage loans are secured by investor properties and were originated under programs that are not subject to the Truth in Lending Act. All other loans comply with the ability-to-repay rules.
Approximately 57.2% of the loans by balance in BHLD 2019-1 are non-qualified mortgage, or non-QM, loans. Approximately 0.4% are rebuttable presumption QM loans, approximately 0.1% are safe-harbor QM loans, and approximately 42.3% are exempt from QM categorization. Morningstar treats rebuttable presumption loans the same as non-QM loans.
Among the strengths of the deal, according to Morningstar, is the fact that borrowers have a significant amount of equity in their homes; the weighted average original loan-to-value ratio is approximately 61.8% and weighted average current LTV is about 59.5%.
The portfolio has also undergone a comprehensive review of compliance, credit, property valuation and data integrity by AMC Services and Clayton.
Oaktree or a majority-owned affiliate will retain an eligible horizontal residual interest, including the note that are first in line to take any losses, in order to satisfy credit risk-retention rules.
However, Morningstar is concerned about a possible “drift” in borrower FICO scores. The weighted average original FICO is 712, but this assumes a score of 500 when no score is provided. While Morningstar generally expects a FICO score to “drift” lower after a borrower obtains a mortgage, it has observed that, when it received a FICO score post-origination, the score for 71 loans dropped by over 50 points.
There are also few very large loans whose performance can have a large impact on the performance of the overall portfolio, particularly toward the end of the life of the deal: Approximately 2.9% of the loans account for approximately 10.3% of the entire pool balance.
The interest payment to the senior classes steps up by up to 100 basis points if the transaction remains outstanding after three years. This will be paid as a first priority from the excess cash flow, which might reduce the amount of excess cash available to cover the losses.
Morningstar expects to assign an AAA to the senior tranche of notes to be offered, which benefits from 28.05% credit support.
