JP Morgan sold a roughly US$440m securitization of prime jumbo mortgages that do not meet qualified mortgage rules on Wednesday, a first for the bank according to ratings agencies.
The bonds are tied to prime jumbo mortgages that are considered non-QM because most of them were underwritten using tax transcripts instead of a signed tax return.
Its previous jumbo RMBS bonds securitized mortgages that met qualified mortgage guidelines, which came into force as part of Dodd-Frank regulation in 2014.
The offered notes in the new deal, Chase Home Lending Mortgage Trust 2019-ATR1, have similar characteristics as its last prime jumbo mortgage securitization, JP Morgan Mortgage Trust 2019-2.
The super senior notes in both deals are structured with 4% coupons and 12% credit enhancement.
JP Morgan declined to comment on the deal.
NON-QM BONDS INCREASE
QM rules specify certain metrics that the loan should meet: they should be 30 years or less, cannot have negative amortization, interest-only payments or balloon payments, and total points and fees cannot exceed 3% of the loan amount.
They are designed to prevent borrowers from obtaining mortgages they cannot afford, and to protect lenders from borrower litigation.
But the volume of RMBS bonds backed by non-QM mortgages has increased rapidly in the last few years, as investors get more comfortable with the product.
Almost US$6bn of non-QM RMBS bonds were sold in the first quarter compared with US$1bn in the same period last year, and under US$500m in the first quarter of 2017, according to Bank of America Merrill Lynch data.
BAML analysts raised their forecast for non-QM RMBS issuance this year on the back of the recent strong supply.
They expect US$21bn to be sold in 2019, up from their US$14bn original forecast. This contrasts with the jumbo RMBS market, where the bank slashed its forecast by more than half to US$15bn, because of slowing demand for jumbo mortgages. nL8N21C4HC
“There’s a lot of interest in issuing (non-QM deals) because there’s a lot of investor demand,” said Suzanne Mistretta, senior director in the US RMBS group at Fitch Ratings. “Execution is really strong.”
Still, the market is growing from a low floor, said Mistretta. Private label alt-A and subprime issuance soared to just under US$1trn in 2006 before the market imploded, according to BAML research.
“It’s expected to keep growing, but it still pales in comparison with what it looked like pre-crisis,” said Mistretta.
QUALITY COLLATERAL
Origination of non-QM loans has increased, fuelling the rise in bond volumes. Rising rates have weighed on the appetite of borrowers to refinance conventional mortgages, forcing originators to compete for more complicated loans outside of the QM box.
BAML cited data from Inside Mortgage Finance which showed non-QM lending grew by 20% last year to US$45bn.
“When viewed against the overall lending environment, this increase is even more impressive considering overall mortgage originations fell 10% in the same 12-month period,” wrote BAML.
Non-QM lending is a broad spectrum.
It can include riskier loans to borrowers with less than pristine credit histories, as well as pristine jumbo mortgages that are too big to be financed by Fannie and Freddie and do not tick the right boxes to be considered qualified - such as the loans in the new JP Morgan deal.
The borrowers in the JP Morgan deal are considered strong credits, with a high weighted average FICO score of 772, weighted average loan to value ratio of 72%, and average liquid reserves of US$437,000. The weighted average mortgage size is US$813,000.
Its senior tranches are rated Triple A by Moody’s and Fitch.
“This is much higher quality collateral than borrowers who are stretching to get a home, which has been increasing,” said Susan Hosterman, a senior director in Fitch’s US RMBS group.
