May was an unusually busy month for private-label residential mortgage bond issuance, and June appears to be off to a strong start as well.
One of the first offerings of the month is from MFA Financial, a real estate investment trust that has spent the past three years assembling $1.72 billion portfolio of 7,000 rehabbed and nonperforming residential mortgages.
On Monday, the REIT launched a $219 million offering of bonds backed by 992 of these loans, joining a growing list of firms active in this market.
The collateral for the deal, MFA 2071-RPL1, has a relatively high percentage of loans that are currently delinquent or were recently delinquent, according to Fitch Ratings. Approximately 13% of the pool is 30-59 days behind on payments, and another 76% is current but has missed a payment in the past two years; only 10.6% has been current for two years or more.
In order to earn Fitch’s highest credit ratings, AAA, for the senior tranche, MFA had to provide 45.1% credit enhancement.
The timing is good.
May turned out to be the most active month for the primary market in two years, with more than $7 billion in new issuance, according to research published Monday by Wells Fargo Securities. In addition to bonds backed by rehabbed and nonperforming loans, Wells’ data includes several kinds of assets that offer exposure to the housing market, including bonds backed by prime residential mortgages, credit risk transfer securities, and single-family rental bonds, in addition to rehabbed and nonperforming loans.
This spurt of supply was generally well received, as investor demand remained strong. For example, two of largest deals priced at spreads that were tighter than initial guidance: an offering of Connecticut Avenue Securities issued by Fannie Mae and securitization of prime jumbo and conforming mortgages by JPMorgan.
“As spreads continue to hover around multiyear tights, we expect issuers to remain active and take advantage of lower funding costs,” the report states.
MFA may not be the only firm looking to access the residential mortgage bond market; several other firms have been aggregating loans in preparation for possible securitization. Last week, Fitch Ratings said it had added four names to the number of loan aggregators and originators on which it performs operational assessments, bringing the total number to 35. These assessments, which cover company and management experience, risk management/quality control, sourcing and acquisition of assets, underwriting/credit evaluation, property valuation, and performance history, can be a precursor to mortgage bond issuance.
In addition to MFA, Fitch performed an assessment on the non-prime activities of SG Capital. It also assessed two new aggregators of prime loans: American International Group and MAXEX. In a report published May 30, the rating agency said that AIG "has a well-structured aggregation platform that is focused exclusively on the acquisition of high-quality mortgages for portfolio investment and potential securitization." MAXEX, on the other hand, is "strategically focused on the application of standardized tools and data for the near-simultaneous buying and selling of prime mortgage loans."
MFA's inaugural deals comes on the heels of one by another REIT, New Residential Investment Corp., which launched a $698 million offering of bonds backed by reperforming loans Monday, in its third deal of the year. The collateral consists of 6,551 loans, most of which were once delinquent but are now making timely payments.
As with most of its prior deals, New Residential acquired the collateral from securitizations trusts that that have become uneconomical to service because so much of the principal has been paid down. It bundles the remaining loans into collateral for new bonds.
Among the strengths of the deal, according to DBRS, is the fact that the loans are of better credit quality than other pools of rehabilitated loans it has analyzed. These loans are significantly seasoned with a weighted-average age of 161 months; 91.2% of the pool is current, 7.6% is 30 days delinquent and 1.2% is in bankruptcy. Thirty percent of the loans have been modified, and in 65.5% of these cases, the modification took place more than two years ago.
The loans are serviced by Ocwen Loan Servicing (58.3%), Specialized Loan Servicing (21.6%) and Nationstar Mortgage (20.1%).
DBRS expects to assign AAA ratings to the senior tranches of notes to be issued, which benefit from 18.5% credit enhancement.
New Residential has issued 11 deals using similar collateral since 2014, and deal performance, though short, has been “satisfactory,” according to DBRS. As of May 2017, 60-day-plus delinquency rates ranged from 0.6% to 6.1% across all deals.