IFR: Firm of mortgage-bond pioneer launches its first RMBS

By Adam Tempkin

-- US RMBS

--Ranieri’s Shellpoint Partners markets deal as Moody’s takes a swipe at lending platform

Shellpoint Partners, a company formed in 2010 with an investment from mortgage-bond pioneer Lewis Ranieri, this week marketed its inaugural non-agency US RMBS transaction.

S&P, Fitch, DBRS and Kroll rated the prime mortgage deal, a US$251.377m trade titled SAFT 2013-1. The US$235.42m 4.63-year a senior tranche received Triple A ratings.

The loans are being originated out of Shellpoint’s wholly-owned New Penn Financial platform. Wells Fargo is the master servicer of the transaction. The deal did not price by press time.

“This is New Penn’s first securitization and therefore the company does not have any securitization history,” Kroll wrote in a pre-sale report.

The Shellpoint deal came out  Thursday with relatively wide price guidance of interpolated swaps plus 240bp-245bp on the Triple A tranche.

Market experts said that last week’s FOMC/Bernanke announcement contributed to the spread volatility, although an ongoing supply/demand imbalance in non-agency MBS has buffeted the market as well, possibly affecting investor reception to the transaction.

Dealers are said to be long non-agency RMBS product, mainly as a result of the Lloyd’s US$8.7bn BWIC auction from two weeks ago.

“Pricing will no doubt be impacted by the recent Fed-induced wholesale retrenchment in asset prices, but I think also by some of the supply/demand imbalance engendered by the Lloyds sale,” said Christopher Sullivan, chief investment officer of the United Nations Federal Credit Union.

“So I would expect RMBS prices generally to come under renewed pressure as quarter-end draws near. It’s an interesting set-up here for this (Shellpoint) deal.”

Sullivan suggested investors would likely require a significant amount of concession on the deal to account for spread volatility.

California concentration

Geographical concentration is also a risk for the deal, as it has been for several recent private-label RMBS deals. There is a high concentration of California-based loans (63% according to Fitch), linked to high home prices, in the portfolio. Some 13%, 12%, and 9.5% are in the San Jose, Los Angeles and San Diego areas, respectively.

“The pool has significant regional concentrations that resulted in an additional penalty of about 15% to the pool’s lifetime default expectation,” said Fitch analysts in a pre-sale report.

While 4.3% of the loans were originated to foreign nationals with no credit score, the weighted average FICO of 770 for borrowers with a credit score demonstrates a strong borrower credit quality, according to Kroll.

While high, the geographic concentration in SAFT 2013-1 is comparable to those seen in recent RMBS transactions, Kroll said.

The mortgage pool consists of 445 first-lien mortgage loans with an aggregate principal balance of US$261.57m. The pool is made up almost entirely of 30-year fixed rate mortgages.

The remaining loans have terms of 10 years (two loans), 15 years (14 loans), and 20 years (one loan).
There are five hybrid adjustable-rate mortgages (ARMs) in the pool - two 5/1, two 7/1 and one 10/1.
Approximately 97% of the pool is fully amortising, with the other 3% (thirteen loans) having a 10-year interest-only (IO) period.

Moody’s calls New Penn “below average”

Rating agency sniping reared its head again regarding the deal, this time directed by Moody’s at a mortgage-lending platform co-owned by Ranieri.

The ratings firm on Thursday published a critical assessment of New Penn Financial, the mortgage-origination platform bought by Ranieri’s mortgage-finance firm Shellpoint Partners two years ago.

The timing of Moody’s report is significant, given that Shellpoint’s deal was marketing. All of the loans in the offering, which are mostly prime jumbo, were originated off of the New Penn Financial platform.

Moody’s was not chosen to rate the deal. Standard & Poor’s, DBRS, Kroll, and Fitch each assigned the senior tranche of the transaction a Triple A rating with 10% credit enhancement. Credit Suisse declined to comment.

Moody’s said that New Penn’s mortgage-lending platform is too new and untested, and wrote a negative “originator review” of the Shellpoint-owned company. The ratings firm described New Penn as “a below average originator of prime, jumbo residential mortgage loans”.

Moody’s said the company, which was bought by Shellpoint two years ago, has “liberal lending guidelines that: allows foreign national borrowers, uses assets for income, and has debt-to-income (DTI) ratios as high as 58%.”

Additionally, the company had high turnover in its underwriting team in 2012, and “weak reserve requirements compared to other jumbo originators,” the agency wrote.

New Penn is a relatively new mortgage originator, having been in business for just five years. Shellpoint Partners LLC, co-founded in 2010 by Ranieri, has owned New Penn for about two years and is the driving force behind its origination growth of jumbo and other types of loans that are ineligible for sale or securitisation to Fannie Mae or Freddie Mac.

Lewis Ranieri was said to have coined the term “securitisation” when he headed up the mortgage-bond department of Salomon Brothers in the late seventies and early eighties, where he helped to price the first-ever private mortgage-backed security.

Moody’s admitted that New Penn adequately vets borrower income and employment, and has “good procedures for rooting out fraud for loans made to non-foreign national borrowers.”

However, “the number and seasoning of the loans are insufficient for Moody’s to give any weight to New Penn’s early loan performance at this time,” Moody’s said. The ratings firm regards New Penn’s loan performance as too recent to assess correctly.

New Penn originated just 158 jumbo loans during the review period — not enough for a meaningful assessment, Moody’s added.

Moreover, New Penn has a “small appraisal management team with no licensed appraisers on staff,” wrote a team of Moody’s analysts led by Kathryn Kelbaugh.

Pricing was expected on Friday afternoon. Shellpoint filed with the SEC last October to issue up to US$2bn in private-label RMBS, and intends to become a programmatic issuer.

Pool of buyers for riskiest CMBS slices grows

By Adam Tempkin

NEW YORK, June 11 (IFR) - There is a growing supply of purchasers for the riskiest slices of CMBS deals and as competition heats up, underwriting is deteriorating in the once-again booming commercial mortgage bond market, according to panelists speaking Tuesday at the annual conference of the Commercial Real Estate Finance Council (CREFC).

There were standing-room only crowds for every session at the trade group's annual New York conference at the Marriott Marquis hotel in Manhattan.

Members of the group, which represents all facets of the CMBS and commercial real estate markets, were excited at the renaissance of the US CMBS market, which may exceed US$75bn in 2013 after seizing up in 2008 after the financial crisis. Approximately US$56bn was issued in 2012.

So-called B-piece buyers, who purchase the bottom-most and riskiest level of the capital stack, historically garnered the highest returns and took on the most risk in CMBS deals. They were therefore awarded great control over each transaction and the loans in it.

But what used to be a small club of B-piece players has mushroomed into a much larger group as so-called fast money players, or hedge funds, are putting in bids for recent CMBS deals.

"B pieces are the high yield bonds of the CMBS market," said one panelist who worked for a new entrant in the B-piece space. "With all of these new players and competition heating up, the market is not as stable as it was."

At least eight mainstay industry players bought the B-pieces of one deal over the last year, while three to four new entrants participated in recent deals. At least seven other players are bidding on B pieces of CMBS deals in an attempt to get into a hot market.

Along with increased competition and an expanded pool of B-piece buyers, leverage has crept up and underwriting has declined in recent deals, panelists said.

Industry participants at the conference questioned whether hedge funds were getting into the business simply as a "trade" to make quick money, or whether there was a sense of dedication that means that some buyers would hold the B-pieces in their portfolios to term.

While several hedge fund managers said that they are dedicated long-term to the sector, one prominent asset manager said that his company's decision to play in the market is a "relative value" assessment.

"We don't have anything necessarily earmarked for the B piece market," he told an audience of hundreds.

"But if we see something we like, we kill it and eat it."

In other words, he said, "trade" might not be appropriate word for his company's strategy in the B-piece sector.

"It's a relative value decision as to whether we're in or out."

One asset manager who is a B-piece buyer said that while credit is loosening, "it's not that bad", and the real problem is "a simple supply and demand" issue.

With at least 17 B-piece bidders now in the market competing for a relatively limited number of deals, B-piece yields are going to continue to compress and underwriting might suffer, as newer entrants might be more reluctant to "kick out" a faulty loan from a securitized pool.

"That being said, considering the great cost and total work that it takes to competently manage a CMBS B-piece portfolio, getting into the business is just not cheap enough to be just a 'trade'," said one hedge fund manager. "This is only a business for us, not a trade."