Western Asset Management has returned with a $291.8 million offering of bonds backed by nonprime mortgages that it originally launched in early November, only to withdraw it amid market volatility.
Arroyo Mortgage Trust 2019-1 is backed by 753 residential mortgages, according to Kroll Bond Rating Agency; it is sponsored by Arroyo Mortgage, an affiliate of Western.
Like Western’s inaugural RMBS – but unlike most other nonprime RMBS – the deal is backed by a mix of older loans and newly originated loans, all of which are making timely payments. The weighted average age of the loan is approximately 28 months, and 43.5% are seasoned by more than 24 months. Another similarity is the high proportion of loans originated using nontraditional methods of documenting borrower income.
However, the new deal is significantly smaller than Arroyo Mortgage Trust 2018-1, which weighed in at $1.25 billion and was backed by 3,160 loans.
Since first launching ARRW 2019-1 in November, Western has added 113 loans and removed 21, according to Kroll Bond Rating Agency. This has “modestly” impacted the overall credit metrics of the pool, in Kroll’s view.
Among the strengths of the deal, according to rating agency presale reports, is the fact that borrowers have significant equity in their homes. The weighted average loan-to-value ratio of the loans (at the time they were originated) is 60.6%, one of the lowest of any nonprime transaction rated by Kroll. However, it’s in line with the weighted average original LTV of Western’s previous RMBS (60.8%).
After adjusting for loan amortization and current home prices for the seasoned loans, Kroll puts the weighted average current LTV even lower, at 55.2%.
Rating agencies look less favorably on the fact that a large portion of the loans were underwritten using nontraditional methods of documenting borrowers’ incomes. All else equal, Kroll would expect default probabilities to be higher for loans originated with less than traditional full documentation. In addition, the five originators that contributing loans to the transaction have a limited focus on alternative documentation loans. Kroll has determined that some of them have “limited internal quality controls and/or internal audit functions as compared to larger lenders.”
And servicing is being retained by the originators, whose staff and systems are tailored to their relatively small self-originated portfolios. As a result, they generally do not have the level of sophistication seen in servicers and subservicers since the financial crisis, per Kroll.
Approximately, 17.9% of loans were originated to foreign national or nonpermanent resident alien borrowers, who have limited established domestic credit histories.
Both Kroll and S&P Global Ratings expect to assign an AAA to the senior tranche of notes to be issued, which benefits from 17% credit enhancement.
