(Corrects timing in first graf)
NEW YORK, June 17 (IFR) - Caliber Home Loans this week sold the first rated non-prime home loan securitization since the financial crisis, a US$137m mortgage bond deal that set an uneasy tone for the sector’s reopening.
The deal was a success with some market participants, who noted that demand outstripped supply by as much as six times on the deal’s top class.
But others, mindful of the lax controls in older-vintage residential mortgage deals, said the deal both expanded credit to riskier borrowers and cut back investor protections.
“Our expectation was that as credit expands, governance would become better,” said Dimitri Rabin, global RMBS and covered bond strategist at Loomis Sayles & Company.
“Instead, I was surprised [the deal] expanded credit and was rated - and the quality of the governance had declined pretty substantially.”
Credit Suisse, sole bookrunner on the deal, declined to comment.
Similar deals made up of mortgages to borrowers with less than stellar credit helped fuel the last crisis.
Rabin and others pointed out that investor protections against loans going bad - a feature in other securitizations of prime quality home loans in recent years - had been cut back in the new deal.
Despite the reduced protections, Ranieri Strategies managing partner Eric Kaplan said the deal nevertheless had been well executed.
“The question is whether [this deal] or any other post-crisis deal’s standards are sufficient to bring back the anchor investors necessary for a scalable market,” he said.
“Many investors say no, but fear that some will ultimately chase yield at the expense of standards.”
RMBS reform advocates, he said, hope this does not come to pass.
The new trade packaged loans from borrowers with an average FICO score of 701 and annual incomes averaging US$144,000.
Caliber, owned by private equity firm Lone Star Funds, sold a couple of unrated securitizations of similar non-prime home loans to a few niche investors last year.
But this was its first RMBS deal with ratings, garnering the imprimatur of Fitch Ratings and DBRS for the securitization of roughly 370 loans to riskier borrowers.
“It’s a positive that the rating agencies are somewhat re-engaging in this part of the mortgage market,” said Jason Callan, head of structured products at Columbia Threadneedle Investments.
The top US$89.424m A1 class of Single A rated notes priced at EDSF plus 160bp, or the narrow end of guidance of 160bp-170bp.
The US$48.35m Triple B rated A2 class of 1.66-year notes priced as expected at EDSF plus 225bp.
Despite the worries about sour loans, Fitch Ratings said in a call with market participants that the new deal included some protections that were improved from those in pre-crisis bonds.
These include better operational and underwriting controls, such as the lender’s promise to comply with the powerful Consumer Financial Protection Bureau’s new “Ability to Repay” rule, Fitch analyst Suzanne Mistretta said.
The rule prohibits lenders from originating higher-priced mortgages without factoring in a borrower’s ability to make monthly payments.
The deal also included a thick credit buffer, as its top-rated notes could withstand a sustained 30% drop in housing prices before seeing a loss, Fitch said.
The issuance of home-loan securities away from agencies controlled by the US government has barely been sufficient to register on league tables.
Only US$23bn of private RMBS has been issued year to date, according to Bank of America-Merrill Lynch data, which showed half of the volume coming from resecuritizations of defaulted and re-performing old mortgages.
“We want the market to come back,” said Rabin at Loomis Sayles.
” we are not sure if we could come back to market with a deal that has no documented relief from conflicts of interest.” (Reporting by Joy Wiltermuth; Editing by Marc Carnegie and Natalie Harrison)