- S&P Global Ratings assigned its overall mortgage operational assessment ranking of AVERAGE to Morgan Stanley Bank N.A. and Morgan Stanley Mortgage Capital Holdings LLC after reviewing their aggregation process for residential mortgage loans.
- Our overall ranking reflects a qualitative subranking of ABOVE AVERAGE and a quantitative subranking of LIMITED.
- Our loss coverage adjustment factor for MSBNA and MSMCH is 1.00x.
NEW YORK (S&P Global Ratings) Sept. 17, 2021--S&P Global Ratings assigned its overall mortgage operational assessment (MOA) ranking of AVERAGE to Morgan Stanley Bank N.A. (MSBNA) and Morgan Stanley Mortgage Capital Holdings LLC (MSMCH) after reviewing their aggregation process for residential mortgage loans, the majority of which are prime jumbo loans. The overall ranking reflects a qualitative subranking of ABOVE AVERAGE and a quantitative subranking of LIMITED.
Based on the results of our MOA, the loss coverage adjustment factor for MSBNA and MSMCH is 1.00x. We may apply this adjustment factor to residential mortgage loans aggregated by MSBNA or MSMCH when determining the final projected losses in our ratings analysis of a U.S. residential mortgage-backed securities (RMBS) transaction.
MSBNA and MSMCH are loan aggregators and subsidiaries of Morgan Stanley (BBB+/Positive/A-2). Morgan Stanley has been in business for over 80 years and is one of the largest financial holding companies in the U.S. Although Morgan Stanley has over 35 years (with certain periods of inactivity) of purchasing, selling, and securitizing mortgages, the company leveraged its business synergies to relaunch and sponsor residential mortgage securitizations via its nonbank entity, MSMCH in 2020.
Morgan Stanley sources and distributes residential loans to support institutional clients' investment strategies. MSBNA, a bank entity, and MSMCH, a nonbank affiliate, source and acquire loans from bank and nonbank originators, aggregators, and government agencies via bulk and flow channels, and generally on a servicing-released basis. Morgan Stanley has a strategic focus on its conduit platform with the continuation of its prime jumbo program sponsorship (approximately 92.5% of its aggregation), but it also has a product mix of new origination and seasoned near-prime, QM and non-QM, reperforming/nonperforming, and investor and business purpose loans. Depending on market conditions, MSMCH plans to strategically grow and sponsor securitizations in other residential mortgage segments, such as agency non-owner occupied products, alternative documentation, and high quality non-QM.
Our overall AVERAGE ranking reflects our qualitative and quantitative review of Morgan Stanley residential loan aggregation, which primarily focuses on the following three areas:
- Management and organization, including risk management and financial position;
- Loan purchase and aggregation process; and
- Internal controls, encompassing third-party management, prefunding data quality, post-funding quality control (QC), and regulatory compliance.
For our quantitative analysis, we reviewed acquisition volume, loan characteristics, and loan performance history, including delinquencies and early payment defaults.
The qualitative subranking on MSBNA and MSMCH of ABOVE AVERAGE reflects our assessment of the following strengths and weaknesses.
The strengths include:
- The management team's industry experience;
- The parent company's long operational track record, financial strength, and creditworthiness;
- Morgan Stanley's thorough review process by the residential loan originator committee for new sellers and comprehensive monitoring of existing sellers, including the use of seller scorecards and a preference to partner with larger, more experienced, and well-capitalized sellers who can contribute to a scalable platform;
- Most loans are purchased servicing released;
- The independent due diligence performed by third-party review (TPR) firms for each control process, including onboarding seller, pre-purchase, and post-closing entity monitoring, as well as post-closing QC;
- The robust pre-purchase process, which includes 100% due diligence and a full re-underwrite by a third-party review firm;
- The robust post-purchase review process, which includes a minimum of 10% due diligence and a full re-underwrite by a TPR firm; and
- The strong independent internal risk oversight with multiple specialized risk teams, including its internal corporate audit and compliance functions.
These strengths are partially offset by the following weaknesses:
- No internal audit reports or schedules were made available to us for review. However, we recognize that Morgan Stanley being regulated by the Comptroller of the Currency (OCC), Federal Reserve, New York Department of Financial Services, Federal Trade Commission, and Consumer Financial Protection Bureau (CFPB) mitigates this weakness to an extent.
- Morgan Stanley's limited loan performance history: MSBNA began trading and purchasing mortgages in December 2017 and MSMCH recently relaunched its sponsorship of residential mortgage securitizations in October 2020.
Our quantitative subranking of LIMITED is based on our review of loan performance provided by MSBNA and MSMCH. Both companies have limited loan performance history: MSBNA started purchasing loans in December 2017, while MSMCH recently relaunched its sponsorship of residential mortgage securitizations in October 2020. Based on the issuer's provided delinquency data and information from third-party sources, the companies' recent securitizations have performed in line with our expectations for post-crisis residential originations with limited performance data. However, we currently don't have sufficient historical data to properly assess and differentiate loan performance from their peers under stressed conditions.
This report does not constitute a rating action.
|Mortgage Operational Assessment Analyst:||Jessica Barbara, New York + 1 (212) 438 1726;|
|Secondary Contact:||Alicia Clarke, New York + 1 (212) 438 8805;|
|Analytical Manager:||Vanessa Purwin, New York + 1 (212) 438 0455;|
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