JPMorgan Chase & Co. (JPM:US) is planning to sell securities backed by $616 million of new U.S. home loans that don’t have government support, its first offering in the so-called non-agency market since the financial crisis.
The bonds are made riskier by the New York-based bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch Ratings said today in an e-mailed report. Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the collapse in home prices.
The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud,” New York-based Fitch analysts including Roelof Slump wrote in the presale report.
The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report. That compares with so-called credit enhancement, created by items such as other bonds being first in line to absorb losses of the underlying loans, of 7.05 percent in a Credit Suisse Group AG (CSGN) deal in February and 6.5 percent in a transaction last month by Redwood Trust Inc. (RWT:US), according to data compiled by Bloomberg.
Jennifer Zuccarelli, a JPMorgan spokeswoman, didn’t immediately return a telephone message seeking comment on the transaction.
The JPMorgan securities are backed by “high-quality prime mortgages,” with average balances of $819,495, according to the Fitch report. That suggests that the loans are so-called jumbo mortgages as such big loans dominate the revival in the non- agency bond market led by Redwood and Credit Suisse.
Those two firms, the only previous issuers since the market revived in 2010, have completed deals backed by about $2.1 billion of new mortgages this year, compared with $3.5 billion in all of last year, according to data compiled by Bloomberg. Issuance peaked at $1.2 trillion in both 2005 and 2006 before collapsing as prices tumbled amid soaring foreclosures and plunging real-estate values.
Jumbo home loans are larger than allowed in government- supported programs, currently as much as $729,750 for single- family properties in some areas. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, limits range from $417,000 to $625,500.
Kroll Bond Rating Agency plans to assign similar grades to the JPMorgan bonds as Fitch, according to a report today.
While it also saw the representation and warranty provisions as a “credit negative,” those features were mitigated by the debt’s high quality and reviews of all of their files by a third-party firm, Kroll said in its presale report.
“If similar provisions were present in a transaction that had lower quality collateral, was subjected to less robust third party diligence review or had a higher proportion of originators that were potentially financially weaker, Kroll Bond Rating Agency might forecast higher expected loss levels or consider a downward adjustment of its ratings,” the firm said.
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