In its second securitization of non-prime residential mortgages this year, the Ellington Financial Mortgage Trust is bringing the EFMT 2021-2 to market hoping to raise $331.8 million.
The deal’s underlying collateral consists of 661 residential mortgages.
What mainly makes the non-prime is that the loans are moderately levered, and about 70.8 percent of the loans in the pool were originated using alternative income documentation. Some 48.2 percent of the loans were underwritten using 12- to 24-month bank statements, according to Kroll Bond Rating Agency. The rest of the loans were exempt from the ability-to-repay/qualified mortgage rule, having been originated for a business purpose, in other words, to be used as investment properties.
From KBRA’s point of view, income documentation is not full where the documentation used covers a short period of time, is indirectly sourced or makes an estimation of actual income (or an inference to actual income) from actual or prospective cashflows. That is the income documentation method that LendSure Mortgage Corp., the Ellington’s affiliated originator, uses.
KBRA noted that LendSure relies on methods of income underwriting that requires corroborating steps, such as verifying deposit levels consistent with the borrower’s occupation, and checking for cash transfers or other inflows. The latter does not necessarily represent income.
Although the LendSure’s income verification process is a credit concern for the collateral loans, KBRA did note a few positive credit positives. The originator, and the servicer, Rushmore Loan Management Services, LLC, both have a lot of experience in residential mortgages and RMBS, respectively.
About 65.4 percent of the loans in the subject pool were originated after the onset of COVID-19 related lockdowns. KBRA says it expects loans underwritten during this period to have benefitted from positive selection and tightened employment verification underwriting standards. The seasoned loans in the pool were generally performing, with about 8.6 percent having demonstrated some delinquency in the past. As of May 1, 2021, the cutoff date, all but five loans were contractually current, but borrowers on the outstanding five affected mortgages have since caught up, making their loans current.
As the pandemic forced a lot of Americans to work from home, the EFMT 2021-2 trust saw a higher percentage of self-employed borrowers, 69.8 percent, than the 2020 and 2021 year-to-date average for non-prime self-employment of 57.3 percent. Business closures and other effects of the lockdown affected self-employed borrowers more severely.
