Starwood Capital's debut RMBS is mix of nonprime, near-prime

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Starwood Capital Group, a private equity firm with a history of investing in nonperforming residential mortgages, single-family rental properties and multifamily rental properties, has expanded into new residential mortgages for borrowers with less-than-stellar credit.

The group’s Starwood Non-Agency Lending unit was formed in 2016 and has only been acquiring nonprime loans since 2017. Unusually, all of the loans in the deal were purchased from a single originator, Impac Mortgage; sponsors more typically aggregate loans for deals from multiple originators. However, Impac is an established player that has been originating mortgage continuously since 1995, including through the financial crisis. It is licensed to originate loans in all 50 states and is a Fannie Mae, Freddie Mac and Ginnie Mae approved seller/servicer.

The $374.1 million transaction, Starwood Mortgage Residential Trust 2018-IMC1, is collateralized by a pool of 889 mortgages, most of which are not eligible for sale to Fannie or Freddie, either because the borrowers have gone through a foreclosure or bankruptcy too recently (3.7%), use alternative documentation to verify their income (61.6%), or are purchasing homes as investment properties (26.4%), according to Kroll Bond Rating Agency.

In addition, this transaction contains smaller subsets of loans that Kroll considers to be "expanded prime" due to certain loan or borrower characteristics, such as loans that would typically require exceptions to prime/superprime guidelines with compensating factors. Impac’s guidelines allow credit scores as low as 600, debt-to-income ratios as high as 50% or more, and loan-to-value ratios above 80%.

The STAR 2018-IMC1 collateral pool does not contain any loans with DTIs above 50%, nor any loans with LTVs above 80%, however.

Some of STAR 2018-IMC1 collateral credit metrics are comparable or more favorable than recently issued prime and expanded prime transactions, per Kroll. While the weighted average FICO is lower than Kroll-rated prime and expanded prime transactions issued in 2018, the weighted average cumulative LTV is lower by 5 to 10 points. And while DTI is not calculated for investor and asset qualification loans by Impac, that of the remainder of the pool is comparable to the weighted average in that same set of transactions.

Furthermore, other credit attributes, such as liquid reserves and free cash flow mentioned below, also evidence the collateral pool’s generally strong credit profile.

"Broadly speaking, the loans in STAR 2018- IMC1 have better credit metrics (CLTV, FICO, DTI) than most contemporary “non-prime” transactions," the presale report states. "This is largely due to those attributes acting as mitigating factors to the investor loan and alternative documentation population in the subject transaction."

However, the collateral for STAR 2018-IMC1 does contain loans with riskier characteristics, including 62 loans (11.1%) tha are interest-only. Of the 11.1%, 10.1% have five-year interest-only terms, 0.8% have seven-year interest-only terms and 0.1% have 10-year interest-only terms; all are followed by a subsequent amortization period such that all loans mature over a total of 30 years. But unlike crisis era interest-only loans, the ones in this deal were qualified using the amortizing payment.

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