JPMorgan Tests RMBS Market with Another Mega Deal

National Mortgage News - Allison Bisbey - 13 February 2017

JPMorgan Chase is known to eschew selling conforming mortgage loans to Fannie Mae and Freddie Mac, preferring to securitize them in the private-label market.

Last year, it came up with a novel structure designed to transfer the credit risk on an unusual mix of jumbo and conforming loans. The hope was that this would allow it to obtain favorable capital treatment on its remaining exposure to the collateral.

Regulators have reportedly told the bank no dice: It will not be permitted to carry its intended risk-weighting on the two transactions.

Nevertheless, it appears that JPMorgan is not ready to throw in the towel and resume selling conforming mortgages to the government-sponsored enterprises. It's still hoping to get better pricing in the private-label market, albeit in a more traditional transaction.

On Friday, the bank launched the $1.03 billion JPMMT 2017-1. Like the two risk-transfer deals completed last year, it is collateralized by both jumbo (63.7%) and high-balance conforming loans (36.3%).

Unlike those two prior deals, however, JPMorgan is selling the bulk of tranches to be issued, both the senior tranches and the riskier tranches. In other words, it's getting the loans off of its books entirely.

Fitch Ratings and Kroll Bond Rating Agency both expect to rate the deal.

There were a lot of hopes riding on the novel structure, which could have helped attract additional private capital to the mortgage market, particularly if other banks followed suit. In a report published Friday, Nomura analyst Brock Vandervliet noted that it would have offered real estate investment trusts a means of participating in a very high return asset well suited to their REIT status.

"We are unclear if this is a complete roadblock or one that the industry can work through," the report states.

In the meantime, JPMorgan Chase will see what kind of pricing it can get securitizing this unconventional mix of collateral in a more conventional deal structure.

JPMorgan Chase Bank itself contributed 36.3% of the collateral for JPMMT 2017-1. Another 18.8% of loans came from Two Harbors, a former mortgage bond issuer that left the market last year, selling the rest of its portfolio to Central Clearing and Settlement, which subsequently sold them to the JPMMT 2017-1 trust. United Shore Financial Services contributed another 14.8%.

All of the conforming loans are originated and serviced by J.P. Morgan, according to rating agency reports.

The loans were made to borrowers with strong credit and significant equity in their homes, which provides investors with a margin of safety should home values decline. The weighted average FICO score is 770 and the weighted average loan-to-value ratio is 69.3%.

There are a number of "super-jumbo" loans so large that they represent an outsized risk to the deal. However, Kroll feels that the large size of the overall pool helps mitigate this risk. The largest in this pool is $1.99 million and represents 0.2% of the pool.

And that's about the only impact the large pool balance had on the deal’s credit quality, according to Kroll. The ratings agency notes, however, that the transaction's size may benefit investors by boosting liquidity, making it easier to add to, or reduce, their holdings.

JPMorgan isn't the only sponsor testing investor appetite for larger mortgage bond offerings. Last month, Cerberus issued $2.1 billion of bonds backed by legacy mortgages that were once delinquent but are now making timely payments.

So far this year, only one other sponsor, Redwood Trust, has come to market with prime jumbo RMBS; its two deals total just over $700 million. The senior, AAA-rated tranche of the second deal, SEMT 2017-2, priced at 1-20 back of Fannie 3.5s, according to research published by Wells Fargo Securities.