First Republic is preparing a private-label residential mortgage-backed securities transaction and could be the first bank to launch this type of deal since the coronavirus initially roiled U.S. markets in mid-March.
"Prior to COVID happening, the market was having its best year since the [2007-2008] crisis happened, but having the pandemic just really changed plans for everyone," said Susan Hosterman, senior director at Fitch Ratings. "Now we're starting to see issuance come back."
Fitch and Kroll Bond Ratings Service issued presale reports on the transaction.
The loans in the $300 million deal were made to high net-worth borrowers with strong reserves, according to the presale reports. Since they are adjustable-rate mortgages with a 10-year interest-only period, the loans did not fit within the parameters of the qualified mortgage safe harbor. The mortgages amortize over a 30-year period in total. The investor loan concentration was 11%.
Most loans met traditional full-documentation standards, but First Republic noted that a small percentage had minor shortcomings, such as a lack of an additional reverification of employment right before closing. Reverification of employment has become more of a priority due to the recent coronavirus-related rise in unemployment. The average age of the loans in the deal is seven months.
Banks are not typical issuers of private-label RMBS, but some have been participating in the market in cases where it looked more attractive than holding the loans in portfolio. While issuance has been sparse recently and buyers are skittish, there is some investor appetite relative to the low supply.
This marks First Republic's first deal under its own name since the 2007-2008 crisis, but it has frequently contributed loans to other players’ transactions since then.
IO loans resulted in payment shock that hurt borrowers during the 2007-2008 crisis, but many of those borrowers were underwritten using loose criteria, and IO loans made to high net-worth borrowers with sufficient reserves tend to perform better.
