Nearly four months after a JPMorgan Chase & Co. residential conduit included loans that fall outside of the qualified mortgage, or QM, rule adopted as part of the Dodd-Frank Act in one of its prime jumbo RMBS pools for the first time, the company is pursuing that approach to even greater effect.
Rating agency presale reports for J.P. Morgan Mortgage Trust 2016-5 indicate that 211 of the 455 pools in the $385.3 million pool were designated as "non-QM," meaning they do not benefit from the rule's safe harbor provided to lenders against litigation for loans that meet the specified criteria.
Kroll Bond Rating Agency observed that the pool included the "largest concentration of non-QM loans" it has rated to date. Approximately 20.2% of the loans in the $302.3 million J.P. Morgan Mortgage Trust 2016-2, which closed Aug. 30, were classified as non-QM, according to Fitch Ratings. That deal was the first J.P. Morgan transaction rated by Fitch that included non-QM loans. Fitch said the conduit had completed 19 private-label RMBS deals since 2013.
Loans with interest-only features accounted for 138 of the 211 non-QM mortgages, Fitch said. Another 55 loans were designed as non-QM as a result of a "missing documentation" relative to Appendix Q, which sets various standards for determining that a borrower's debt-to-income ratio does not exceed the 43% threshold required for a QM loan. The remaining 18 loans were designated non-QM as a result of what Fitch described as "missing profit and loss statements, missing balance sheet or other immaterial documentation issues relating to employment verification."
First Republic Bank, which originated 87.3% of the J.P. Morgan Mortgage Trust 2016-5 pool, produced all the non-QM loans, Kroll said. The same institution was the sole originator of the collateral backing J.P. Morgan Mortgage Trust 2016-2.
Bank executives highlighted the August RMBS deal in remarks made during a November investor day. Chief Credit Officer David Lichtman said at the time that J.P. Morgan Mortgage Trust 2016-2 had been the "first one done" with non-QM loans.
J.P. Morgan "used the First Republic's mortgages, 100% First Republic mortgages, not JPMorgan's originated loans, in that security, so that's a heck of a compliment to their perception and the market perception of the strength of our loans," he said.
COO Jason Bender observed that the QM rules had "really impacted" the securitization market in recent years.
"What's been encouraging is that the ... markets are now starting to find some acceptance for those types of loans via securitization," he said, referencing Lichtman's comments about the J.P. Morgan deal.
In addition to the two J.P. Morgan transactions, Fitch also rated three deals that included non-QM loans aggregated by Hudson Americas LP, an affiliate of Lone Star Funds, on the COLT platform. Fitch also said the aggregator had completed two unrated RMBS deals that incorporated non-QM loans.
The most recent of the rated deals, COLT 2016-3, has an even higher concentration of non-QM loans than J.P. Morgan Mortgage Trust 2016-5 at 62% of the pool, which totals 474 loans with an aggregate balance of $225.7 million. Originators include Caliber Home Loans Inc., the banking unit of Sterling Bancorp Inc. and LendSure Mortgage Corp.., all of which underwrite non-QM loans. The non-QM concentrations of COLT 2016-1 and 2016-2 were approximately 52% and 53%, respectively, according to DBRS.
Rather than interest-only features, Fitch said 112 loans in the COLT 2016-3 pool were designated as non-QM since they had been underwritten to certain bank statement programs inconsistent with Appendix Q standards and the rating agency's view of a fully documented loan. Fitch said it applied a probability of default penalty of 1.4x for those loans and doubled its assumed probability of ability to repay claims.
In J.P. Morgan Mortgage Trust 2016-5, Fitch said it made loss severity adjustments for the non-QM loans but did not apply any additional penalties due to the high FICO scores and substantial liquid reserves of the underlying borrowers. Kroll said it made "an additional adjustment" regarding the non-QM loans in that deal to account for "the greater risk of potential litigation-related losses relative to prime loans with QM safe harbor protections."
Some market participants have viewed higher interest rates as a potential catalyst for additional non-QM lending, particularly in the form of interest-only loans. DBRS reported that Caliber is targeting $774 million in non-QM originations in 2016, but that would represent a small fraction of a target for overall mortgage production of more than $34 billion. Another company, Impac Mortgage Holdings Inc., is seeking to originate upward of $1 billion in 2017 through its non-QM program, a company official said during a November call.