JPMorgan Chase Bank has become the first institution to file a residential mortgage-backed securitizations deal that qualifies under the Federal Deposit Insurance Corporation’s six-year-old Safe Harbor rule, and it’s filed a doozy.
On April 1, Chase Mortgage Trust sold a group of RMBSs worth $1.88 billion, Chase 2016-1, one of the largest filings of its kind since the recession. It is also the first since the FDIC enacted updated Safe Harbor rules in 2010 to protect financial institutions and investors in the securitizations market. The deal also is the first transaction from JPMorgan Chase to be entirely backed by mortgages‒‒about 6,000 of them‒‒that the bank already owns.
The transaction is essentially a credit risk transfer and is expected to reduce the risk borne by U.S. taxpayers while bringing more private capital back into the mortgage market. The deal should also help restore private-sector securitization that will fortify the U.S. housing system.
According to Moody’s Investor Service, the securitized mortgage loans backing Chase 2016-1 are isolated from consolidation risk “in the unlikely event that the sponsor, JPMorgan Chase Bank, becomes insolvent.”
Also according to Moody’s, the filing’s capital structure is “simple and contains tight triggers,” including a simple six-tranche transaction structure (Safe Harbor’s limit) meant to redirect potentially diminishing notes bound for more junior notes to more senior notes. The transaction’s pro-rata payment structure contains performance triggers that protect certificates under a range of performance scenarios and are “tighter than comparable triggers in standard shifting-interest structures.”
Other aspects of the transaction that make it stand out in the post-crisis mortgages market include a lack of principal and interest servicer advancing designed to bolster liquidation recoveries on delinquent loans for senior bondholders and help cash flows driven by servicer stop-advance policies or practices more predictable; and more immediate recognition of modification losses that divert more cash to senior bonds producing higher interest.
There also is the retention of a 5 percent economic interest‒‒a vertical strip‒‒on certain bond classes, which is designed to align the bank’s interest in the credit risk of the underlying loans with investors’ interests.