Contents

RMBS

Suburban bounce

SFR volumes up as renters vacate cities

Single-family rental (SFR) securitisation issuance has picked up this year, despite coronavirus-related volatility. Notably, suburban developments appear to be benefiting as renters seek alternatives to the urban environment.

“The impact of the Covid-19 environment on the economy and real estate assets continues to unfold,” says Daniel Tegen, senior director at KBRA. “The resulting implications on cashflow and value will vary by property type, market and the duration of underlying leases. For the single-family rental sector, tenants who had experienced financial hardship related to the Covid-19 pandemic may have been offered rent deferrals or payment plans that may still be in effect, while eviction moratoriums may be in place in certain jurisdictions.”

He adds: “Securitisation performance is relative to net cashflows. The potential for rent increases and lease renewals is specific to each operator and to the markets in which they have a presence.”

Nevertheless, the ability of SFR operators to make rent collections is still evident. For example, during the last quarter, Invitation Homes recorded more than 92% rent collection. While the firm has paused new issuance due to Covid-related volatility, it has restarted acquisitions activity.

Jyoti Yadav, analyst at Trepp, says: “It is a countercyclical market, so people tend to rent more when the economy is not doing well, instead of buying new homes. However, there is also an increase in home buying activity. It is still too soon to say if issuance will continue to increase.”

She continues: “The biggest trend is that a lot of players are moving in. It seems to be the case that they are really taking a look at the market again.”

For instance, Brookfield Asset Management has reportedly acquired a controlling stake in Conrex, which operates over 10,000 rental homes across the Midwest and Southeastern US. Further, JPMorgan and American Homes 4 Rent’s joint venture has recently been expanded to US$625m from US$250m.

Market participants have shown continued interest in build-to-rent SFR communities. According to Trepp data, recent SFR developments have been focused in Arizona and on the suburbs.

At mid-way through 2020, the firm calculates that US$3.15bn of SFR bonds have been issued and at least US$1bn remain in the pipeline. This compares to US$3.8bn of issuance for full-year 2019.

KBRA, for one, has rated four SFR securitisations so far in 2020 - FKH 2020-SFR1, TAH 2020-SFR1, Progress 2020-SFR² and Progress 2020-SFR1. Notably, the loan balance of the most recent fixed-rate transaction - FKH 2020-SFR1, which closed last week - is US$826.2m, with a property count of 3,847. The average BPO value is US$238,641, while the loan has an LTV of 90% with an issuer debt yield of 4.9%.

Tegen concludes: “At the inception of the institutional SFR securitisation sector in 2013, the underlying collateral loans predominantly carried floating rates of interest. Since that time, operators have frequently elected to fully repay the floating-rate loans rather than exercise the available maturity extension options. Over the past couple of years, loans originated to institutional operators have primarily been fixed-rate financings in a relatively low interest rate environment.”

Jasleen Mann

RMBS

Lack of transparency

Reporting discrepancies cause confusion

US RMBS reporting discrepancies are becoming a source of confusion among investors, with some shelves and servicers not always reporting loans in forbearance as delinquent. These discrepancies appear to be more visible in the reperforming loan space, where there has been a significant increase in modified loans with ‘current’ status that are not amortising.

To address the increased servicing advance obligations arising from Covid forbearance measures, some servicers are modifying loans on a monthly basis to recoup the advances. Yet the loans are classified as current, even though they are no longer making their contractual monthly payment. By not advancing on delinquent loans, some mezzanine bonds are in turn seeing interest shortfalls or write-downs.

Complicating the picture even further is that advancing requirements across RMBS 2.0 deals vary according to the sector and shelf. As a result of reporting a modification and recognising a loss each month or reporting a modification and re-capitalising the mortgage balance by the unpaid monthly payment, the percentage of 30-day plus delinquency levels for some deals could be understated. For example, BofA Global Research analysts note that deals could be understated by five points for jumbo pools, around 10-12 points for RPL and legacy deals, and 20 points for non-QM deals.

Vadim Verkhoglyad, principal analyst at dv01, stresses the importance of addressing reporting inaccuracies and the lack of standardisation across the RMBS market. “Outdated reporting in the non-agency mortgage market hampers the sector's ability to fully recover from the 2008 financial crisis. No fixed income market segment in the world has shrunk nearly as much as the non-agency market, even though the housing market has largely recovered,” he says.

He adds: “Numerous participants, in particular investors, have never returned to this sector, and many institutions actively avoid it. The primary source of their aversion is and the mistakes of the pre-2007 mortgage market was the lack of data transparency and antiquated reporting, which has not been updated since.”

Indeed, Verkhoglyad suggests that reporting errors create further doubt in this sector and could lead to even more investors shunning the market, on top of those that haven't returned since the GFC. Consequences of reporting discrepancies include stakeholders struggling to determine which borrowers are due to pay their loans. Further, a lack of confidence in purchasing bonds can be brought about by data asymmetries and any corrections made later can result in more bond pricing and valuation volatility.

Verkhoglyad concludes: “We review all information about a loan, its outstanding balance, payment information and supplemental filings to determine if a modification may have occurred. We also validate our findings against third-party sources (trustee reports and master servicer data), and we have constant communication with all parties to align what each party believes to be the correct reported amount of modifications.”

Jasleen Mann

Structured Finance

SCI Start the Week - 17 August

A review of securitisation activity over the past seven days

Last week's stories
Collections clarity
Payment arrangement ABS strengthened
Problem solving
Apex Group, answers SCI's questions
Repeat patterns
CLO equity activity continues to be challenged

Other deal-related news

• The percentage of US CMBS repeat loans dropped to 17.7% in 2019 and to 13.9% in 1H20, down by 21.4% year-over-year (SCI 10 August).
• Piraeus Bank has filed an application for inclusion of its Phoenix non-performing loan securitisation under the Hercules Asset Protection Scheme (SCI 11 August).
• Moody's is now including climate risk data and analytics from its majority-owned affiliate Four Twenty Seven in its research on and ratings process for US CMBS and CRE CLOs (SCI 11 August).
• Moody's has changed the direction of review for 11 tranches of rental car ABS issued by Hertz Vehicle Financing II (HVF II) to under review for upgrade from under review for downgrade (SCI 12 August).
• Fitch has taken various rating actions on 32 classes and related exchangeable notes from four GSE credit risk transfer transactions issued between 2014 and 2015 in response to the placement of the US sovereign rating on negative outlook (SCI 12 August).
• Fannie Mae and Freddie Mac are increasing the loan-level price adjustment (LLPA) by 50bp as an adverse market delivery charge on effectively all mortgage refinances, except for construction loans, with settlement dates after 1 September (SCI 13 August).
• Moody's has upgraded its ratings by one to two notches on the class B to F notes issued by Aurorus 2020, which priced last month, reflecting the correction of an input error in the application of the early amortisation triggers in its cashflow analysis (SCI 13 August).
• In a recent Staff Report, the New York Fed examined the economic mechanisms that limited arbitrage between the cash and forward markets of agency MBS, and whether its asset purchases alleviated price dislocations (SCI 13 August).
• June collections for Italian non-performing loans were 78% higher than those in May and 6% higher than the pre-Covid average (SCI 13 August).
• The US Court of Appeals for the Second Circuit has ruled that investors should keep roughly US$1bn received from various Lehman Brothers affiliates after the bank's 2008 bankruptcy filing triggered the liquidation of dozens of CDOs (SCI 14 August).
• Fitch has downgraded the class A, B and C notes issued by Lunar Aircraft 2020-1 and assigned all classes a negative rating outlook, while removing the rating watch negative placement (SCI 14 August).
• MaplesFS has advised Crystal River CDO 2005-1 noteholders that it intends to terminate the provision of all services to the issuer - including resignation of the directors and registered office - by initiating the termination clause of the administration agreement (SCI 14 August).
• The Structured Finance Association has submitted a comment letter to the CFPB agreeing with its proposal to delay the scheduled expiration of the GSE's qualified mortgage 'patch' until the new proposed General Qualified Mortgage Rule is in place (SCI 14 August).
• Moody's has downgraded from Aaa to Aa2 the class M2, M2F, M12 and M2I notes issued by STACR 2014-DN1 (SCI 14 August).
• Since unanimously rejecting M&G Investment Management's cash offer for the company, UK Mortgages says it has consulted extensively with shareholders to seek perspectives on the offer, as well as its strategy and prospects (SCI 14 August).

Data

BWIC volume

Secondary market commentary from SCI PriceABS
7 August 2020
USD CLO Mezz/Equity
A quiet end to the week with 7 covers which in general suggest a continued tightening tone - 4 x A and 3 x BBB today. The single-As trade 248dm-362dm. The 2023/2024 RP profile single-As trade 248dm-306dm tighter to 280dm-320dm recent context. At the wide end of today's single-A trades is a shorter dated WAMCO CLO MHAWK 2014-3A C 362dm / 3y WAL wide to recent trading in vh200s context, the metrics are weaker with 2.56 ADR, 11.2 Sub80, 3823 WARF, 10.3% CCC and a neg par build -3.07.
The BBBs trade 394dm-440dm given across wide RP profiles, with the most liquid BBB cohort the 2024 RP profiles Canyon Cap's CANYC 2019-2A D covers 424dm / 8.31y WAL which is at the tighter end of recent context 400dm-470dm, the metrics look clean (ADR 0.7, Sub80 3.85, WARF 2901, CCC 5.3).
EUR MEZZ/EQUITY CLO
There are just 1 x BB & 2 x B today. The BB is CADOG 5X ER which traded at 763dm which is in line with recent levels.
The single B's traded between 980dm and 1000dm. We haven't seen any single B's trade by BWIC for a while so this is useful colour.
SCI proprietary data points on NAV, CPR, Attachment point, Detachment point & Comments are all available via trial, go to APPS SCI + GO on Bloomberg, or contact usfor a trial direct via SCI.

Structured Finance

Mixed outlook

Divergent default performance highlighted

Second quarter corporate default data reveals a cluster of defaults around retail, services and the automotive sector as post-Covid negative outlooks for all three persist. However, the default landscape between the three segments shows some marked differences, with retail being hit the hardest.    

According to Euler Hermes data, corporate defaults were clustered in the retail, services and automotive sectors in Western Europe. Indeed, the region posted the largest increase in insolvencies to 64 in 2Q20, up by 38 from the previous quarter - ahead of North America, which recorded 52 cases, up by 30 from the previous quarter.

Western Europe also remained the largest contributor to the global insolvency count for the first half of the year with 90 cases, ahead of North America with 74 cases.

Retail, in particular, is suffering a severe setback due to Covid-19. Scope Ratings notes that there were around 100 bankruptcies among retailers in the EU, UK and the Nordic region, with over a €50m annual revenue in 1H20, compared to 82 for the previous year, 41 in 2018 and 42 in 2017.

Scope comments: “The UK, one of Europe’s most competitive markets with a high level of e-commerce penetration, accounted for 50% of the total number of 1H20 defaults, with high numbers in other countries such as the Netherlands and Ireland – partly a reflection of the fragmentation of these countries’ retail sectors.”

Hence, the agency cautions that the outlook remains mixed for the sector, since much will depend on the strength of the economic recovery, Europe’s ability to avoid a repeat of the drastic lockdowns witnessed earlier this year and possible changes in consumer behaviour.

The default landscape for the automotive sector, on the other hand, remains less severe. Euler Hermes states that in 2Q20 there were 13 insolvencies in the automotive supplier, retailer and car-rental subsectors in Western Europe and North America.

Covid-19 has sped up the cyclical downturn confronting the industry after the peak in global light vehicle sales in 2017 and 2018. Scope’s forecast is an approximately 21% drop in 2020 European sales, slightly worse than the 15% to 20% global decline.

However, “the second-quarter performance of the European industry was not quite as bad as we expected, with manufacturers able to offset the steep decline in sales volumes and revenues with significant cost cutting, helped by short-time working programmes and the forced closure of entire factories in response to the health crisis,” states the agency.

Scope expects a strong partial 2H20 rebound in European sales as consumers take advantage of incentives - such as temporary VAT reductions in Germany – to buy new cars, though past experience suggests that changes in taxation and subsidies tends to bring forward rather than create extra demand.

Given the broad economic uncertainty, the agency expects that it will take some time for demand to return to 2019 levels, leaving original equipment manufacturers and their main suppliers - while not necessarily at risk of default - contending with much reduced operating profitability. Smaller companies in the supply chain may prove more vulnerable as government support ends later this year and early in 2021.

The same notion seems to hold for the integrated oil and gas sector. Hence, despite a negative outlook, oil and gas companies have acted decisively to conserve cash when faced with the double blow of the economic crisis and collapse in oil prices in March and April.

European oil and gas firms used their strong balance sheets to tap bond markets and shore up liquidity, cut back operating costs - partly by furloughing staff - and reduce capital expenditure. In some cases, companies have reduced dividends - as in BP’s case - or offered shareholders a scrip alternative, as was the case with Total and its final 2019 dividend.

The situation in the US sector has been more mixed, with domestic firms showing their financial resilience - though in the shale sector, exploration and production company Chesapeake Energy filed for Chapter 11 bankruptcy at the end of June.

Scope concludes: “The operating context for oil firms now looks considerably more stable, assuming no significant second wave of Covid-19 infections. One important factor is the recent stabilisation of crude prices around US$40 a barrel, helped by an OPEC agreement on production cuts.” 

Stelios Papadopoulos

Structured Finance

Freddie, Fannie fight back

The GSEs have come out swinging after widespread denunciation of the LLPA

Fannie Mae and Freddie Mac have offered a robust defence of their August 12 announcement to impose a 50bp loan level price adjustment (LLPA) on mortgage refinancing from September 1, which has elicited a firestorm of criticism from wide sections of the industry and government.

The GSEs yesterday issued a lengthy joint statement which stressed that the decision to pass on the 50bp fee resides with the lenders, some of whom may choose to absorb the fee “given market conditions”. Even if the fee is passed onto borrowers refinancing their mortgage, the extra cost will be minimal and also more than offset by record low rates, the statement says.

Issued in the names of Freddie CEO David Brickman and Fannie CEO Hugh Frater, the statement roundly refutes the misapprehension that this action will cause mortgages to “go up.”

The statement offers a laundry list of some of the the actions taken by the GSEs since the beginning of the Covid crisis to protect borrowers and ensure the liquidity of the mortgage market, but while the GSEs are “proud of this effort” it has not been costless and delinquencies will continue. “This modest fee will help us continue helping those who are really hurting during the pandemic,” the statement says.

Yesterday a cabal of Democratic senators joined the chorus of disapproval and wrote to Federal Housing Finance Authority (FHFA) director Mark Calabria to raise their concern about the so-called adverse market refinance fee.  “This sudden additional charge will affect loans currently in the refinance process and could cause both confusion and increased costs for homeowners,” they said.

Senate banking committee chairman Mike Crapo (R-Idaho) last week also complained about the move and requested a letter from Calabria explaining why the FHFA had deemed the move necessary.

The Trump administration has not been silent either. “The White House has serious concerns with this action, and is reviewing it,” it told the Wall Street Journal last week.

These comments are significantly milder than the torrent of vilification that has poured forth from other sections of the industry. A flavour of the above might be discerned from the statement issued by the California Mortgage Bankers’ Association (MBA) two days ago: “The announced imposition of a new 0.5% fee on all GSE refinance transactions is an unwarranted, opportunistic, ill-timed, and potentially devastating blow to one of the few economic sectors that has helped support the U.S. economy during the unprecedented health and fiscal crisis we currently face”.

Twenty four hours after the announcement of the LLPA, 27 trade organizations, led by the national MBA, issued a joint statement which termed the new fee an “illtimed, misguided directive” which also “undermines and contradicts” Fed policy.

Sources close to the GSEs suggest the agencies are hopping mad at this tsunami of hostility, which they see as exaggerated and unfair. They believe, for example, that the LLPA will reduce savings in an average mortgage by just $15 a month - much less than some estimates that have been floating around.

As they allude to in yesterday’s statement, the GSEs feel that they are attracting unjustified criticism for imposing a refinancing charge, as it is the decision of the lenders to pass this on to borrowers not that of the agencies.

They also believe that the fee is necessary to ensure continued stability at a time of considerable economic uncertainty. This belief, of course, has underlined the many questions that surround the current capital resources of the GSEs as the FHFA readies both agencies to exit conservatorship. It seems that neither are well-insulated enough against the storms that may lie ahead, or the fee would not be necessary.

The GSEs’ belief that some lenders might choose not to pass on the fee is supported by some independent analysis. “Lenders might be willing to keep the fee if they want the volume,” says Moody’s senior analyst Lima Ekram.

She also believes that the fee will improve RMBS quality as it acts as a disincentive for borrowers to take on more debt through cash-out refinancing - or re-mortgaging. “It’s a credit positive for cash-out refinancing loans because these loans are more risky than other loans as borrowers are extracting equity and taking on more debt,” Ekram explains.

Other sources suggest that the refi fee has ruffled so many feathers because it was unexpected and also because it starts almost immediately. “This thing starts two weeks after the announcement. Normally you get a heads up of a quarter or two quarters, but not this time,” says one MBS investor.

Simon Boughey

Capital Relief Trades

Car capital relief

JPM Chase tests the auto loan waters with new CRT deal

Investors and analysts have given a cautious welcome to the latest JP Morgan CRT deal - a $1.8bn auto loan securitization, which also marks the bank’s return to the auto loan sector market after an absence of 14 years.

The deal is being marketed at the moment. The loan pool consists of a prime retail auto loan portfolio consisting of 82,824 reference obligations

It follows two MBS CRT deals in the last ten months, the last of which was printed in July, and seemingly signifies a confidence by the issuer that CRT deals are now likely to receive the necessary regulatory approval by the Office of the Comptroller of the Currency (OCC)>

Nonetheless, analysts in the US suggested that the auto loan securitization might be something of a one-off as mortgage-backed securitization is really what is needed for CRT deals to gain traction in the US.

“Mortgages are really what you need to gain a foothold in the US from a non-agency perspective,” says one experienced market-watcher.

The deal comprises a $1.8bn seven-tranche offering, of which the $1.583bn A certificates are retained by the borrower and are not rated. The remaining $200m is divided into B, C, D, E, F and R certificates, which are rated AA, A, BBB, BB, B, and unrated respectively. It is this portion that comprises the CRT.

The largest tranche of the above is the AA-rated $141m B tranche, which carries a 4.68% credit enhancement. The A certificates, retained by the issuer, have a 12.50% credit enhancement, while the $27.87m unrated R certificates at the bottom of the capital stack have zero credit enhancement. All tranches have an expected legal maturity of 25 January 2028.

JP Morgan Chase declined to comment on its transaction.

In a pre-trade report published today (21 August) Fitch Ratings notes that the transaction achieves transfer of credit risk to noteholders “via a hypothetical tranched credit default swap, which will reference the pool of fixed-rate auto loans.” As in all CRT deals, note performance is based upon the performance of the overall loan pool. Interest paid monthly based on the fixed coupon of each class of notes.

Fitch Ratings was unavailable for comment.

JP Morgan Chase’s quarterly earnings call divulged that auto loan and lease financings surged in May and June after a quiet April. Originations increased by 20% in June, resulting in a record total volume of $3.7bn of new loans.

While such structures are far from common in the US, they are an established feature of the securitization market in Europe. Performance of the notes will be scrutinized closely as loan delinquency could rise across the board over the next few months with the end of the expanded unemployment relief at the end of July.

“As far as wide adoption is concerned, I’m not sure this is something that is going to take off this year, depending on how credit risk goes,” says another analyst.

Simon Boughey

Capital Relief Trades

Risk transfer round-up - 20 August

CRT sector developments and deal news

Banca Carige is rumoured to be readying a capital relief trade referencing corporate loans for 2H20. The transaction would be the Italian lender’s first significant risk transfer deal (see SCI’s capital relief trades _database).

Capital Relief Trades

Freddie trifecta

Freddie prints its third STACR since lockdown, while Fannie remains on sidelines

Freddie Mac yesterday priced another STACR deal, its third since lockdown conditions began in early March. Its 2020-DNA4 comprised $1.088bn of M1, M2, B1 and B2 tranches, and, like the previous two offerings there will be an associated ACIS insurance policy to transfer additional risk.

The $295m M1 tranche carries a 3% coupon with a weighted average life (WAL) of 2.13 years, is rated BBB/A- to pay one-month Libor plus 150bp. The $368m M2 tranche carries a coupon of 1.75% and a WAL of 5.23 years to pay one-month Libor plus 375bp. It is rated BB/BB+.

Rated B/B, the 0.75% B1 tranche was upsized from $250m to $300m, has a WAL of 9.32 years and pays one month Libor plus 600bp. The 0.25% B2 tranche has a WAL of 10 years, is unrated and pays one month Libor plus 1000bp.

The first STACR deal since lockdown, the $1.1bn 2020-DNA3, was priced in early July and was also upsized. The M1 paid Libor plus 150bp in that deal as well, though the 2, B1 and B2 tranches were slightly less generously priced.

It then printed another STACR, the $835m 2020-HQA3, at the end of July, announced in early August. In that deal, the M1 paid Libor plus 155bp, the M2 paid Libor plus 360bp, the B1 paid Libor plus 575bp and the B2 paid Libor plus 1000bp - like yesterday’s deals.

Freddie Mac was unavailable for comment. While it has been re-energising the CRT bond market in recent weeks, Fannie Mae has been a notable absentee. Sources close to Fannie suggest it is eschewing the CRT market until clarity has been gained with regard to new capital requirements.

Simon Boughey

CLOs

New targets

US CLO spread and issuance targets raised as previous levels already met

US CLO triple-A and triple-B secondary spreads are now at 150bp and 450bp, while net primary supply passed US$27bn this week. As a result, post-Covid crisis targets for the entirety of 2020 set by JPMorgan CLO research analysts have already been met or exceeded and have consequently been revised upwards.

“It seemed almost inconceivable spreads would tighten so much so quickly, but we see some more room to go and update our year-end forecasts to 135bp for triple-A and 375bp for triple-B for mid-tier (implies a 30bp-65bp premium to pre-Covid-19),” the analysts say. “We’re not being blasé about risks to the economy, but CLO technicals are supportive and yields are low globally. On the underlying credit side, the rolling 12-month leveraged loan upgrade-to-downgrade ratio is low (0.18), but loan downgrade activity has been easing (five in August, 15 in July, 41 in June).”

They also note that CLO triple-A paper has been pricing on top of high grade but has decoupled since July, with CLOs about 25bp tighter to 142bp and JULI around 167bp. However, they add: “CLOs risk a pullback if equity volatility picks up, but competing markets - such as corporate bonds - are more exposed in the case of interest rate volatility. Dispersion has also dropped with spreads, but remains pronounced in triple-B to single-B, as lower quality bonds have lagged the recent tightening.”

In primary, the JPMorgan analysts report that the lower end of their US$50bn-US$70bn gross new issue supply target may be breached soon as it already stands at US$47.4bn year-to-date and could by year-end reach towards the higher end. “A US CLO supply year pushing US$70bn would be similar to 2016 and requires an average US$5.6bn in the next four months, though collateral sourcing is a hurdle as net supply in loans is lagging high yield,” they say.

Meanwhile, JPMorgan’s net supply target of US$25bn has already been breached and has consequently been revised to US$45bn. “Using our CLOIE index analytics as an illustration, if even part of the US$17.2bn theoretical coupon paid out this year is reinvested, this represents a demand buffer in the market if supply continues normalising,” the analysts conclude.

Mark Pelham

Structured Finance

Hotels dominate special servicing transfers

Sector developments and company hires

Hotels dominate special servicing transfers
During 1H20, 1,065 US CMBS loans totalling US$40.1bn (representing approximately 7% of total outstanding CMBS) transferred to special servicing, as CMBS borrowers continued to grapple with the economic impact of the coronavirus pandemic, according to Fitch. The vast majority of these transfers, more than 900 loans totalling US$35.5bn, occurred during 2Q20. In comparison, special servicers had only 674 CMBS loans totalling US$9.1bn in their care at year-end 2019.

Of the 1,065 loans transferred to special servicing so far during 2020, 62% by loan count and 53% by balance are currently 30 days or more delinquent. As a result, outstanding advances for CMBS loans among the four largest master servicers - Wells Fargo, Midland Loan Services, KeyBank and Berkadia Commercial Mortgage - grew to US$1.5bn, as of July.

Common forms of debt relief granted to CMBS borrowers so far are reallocation of reserves to pay debt service, interest-only periods, principal and interest or reserve payment forbearance, and changes to waterfall structures for cash-managed loans. Fitch also expects an increase in extensions for maturing loans, given limited refinancing options for retail and hospitality assets. During the first six months of 2020, 50 non-performing matured loans totalling US$4.1bn transferred to special servicing.

Of the loans transferred to special servicing during 1H20, 54% by count are secured by hotel properties and 32% by retail. By loan count, the New York, Houston, Chicago, Los Angeles and Dallas metro areas have seen the largest number of loan transfers.

MERS eRegistry integration underway
MERSCORP Holdings has partnered with the Federal Home Loan Bank (FHLBank) system to facilitate use of the MERS eRegistry by FHLBank member financial institutions wishing to pledge eNotes as collateral. The 11 FHLBanks, which serve nearly 6,900 member financial institutions across the country, announced in February they are developing a solution that will pave the way for their members to pledge eNotes as eligible collateral (SCI 15 November 2019).

To become eligible to submit eNotes, FHLBank member financial institutions will need to work simultaneously with their respective FHLBank and MERS to execute the necessary legal and operational requirements, implement a compliant eVault and integrate with the MERS eRegistry. Several FHLBanks expect integration to be complete in 3Q20, while the remainder expect to be fully integrated in 4Q20 and continuing into 2021.

North America
Kevin Duignan has been appointed global analytical head of Fitch. He will also continue in his role as global group head for financial institutions, which he has held since 2017, until a successor is appointed. As global analytical head, Duignan will oversee the analytical teams that produce credit ratings and related research on over 20,000 entities around the world for all the sectors covered by Fitch. He is based in New York and will report to Ian Linnell, president of Fitch.

Structured Finance

Special servicing assets transferred

Sector developments and company hires

Special servicing assets transferred
The assignment of substantially all of the assets of C-III Asset Management to Greystone Servicing Company, pursuant to the applicable PSA associated with each of the C-III specially-serviced CMBS, is complete. The assignment includes 64 transactions rated by Moody's and 28 Moody's-rated US conduit CMBS that hold C-III specially-serviced companion loans, but excludes the non-C-III specially-serviced companion loans.

Greystone announced in January that it had expanded its capabilities into special servicing with the acquisition of C-III and its US$20.7bn servicing portfolio. The new special servicing group at Greystone is led by Paul Smyth, who joined the company last year (SCI 30 September 2019), having previously served as president of C-III in a prior role before taking the global chief credit officer, CRE position at Credit Suisse in New York for several years.

In other news…

COSME guarantee inked
The EIF and Raiffeisen Bank have signed a guarantee agreement allowing the bank to increase its lending capacity to offer €12m of new financing with better terms and conditions to SMEs in Bosnia and Herzegovina. In addition, the bank will be able to extend its support to a wider range of clients, including start-ups in the country whose restricted lending opportunities due to high credit risk have been even further narrowed by the pandemic. The EIF guarantee is provided under the COSME Loan Guarantee Facility, as part of its COVID-19 economic support package introduced by the EU to provide working capital to European SMEs.

EMEA
Aslan Ozdemir has been appointed as associate director, operations and consequently co-policymaker of SANNE in the Netherlands (SGNL), with approval by the Dutch Central Bank. He joins SGNL country head Yasemin Demirtas and EMEA md Sean Murray as Dutch Central Bank policymakers meeting local regulatory requirements, as senior leaders of the business.

North America
StoneX Financial has hired Brian Vescio as the head of its structured credit products business. He will oversee the management of the business and be responsible for building it out beyond the firm’s core agency mortgage activities to encompass additional structured credit offerings, including ABS, CLOs, CMBS and non-agency RMBS. Vescio brings nearly two decades of experience managing structured product portfolios for the proprietary trading businesses of ING, Deutsche Bank and RBS. In the past five years, he managed non-agency mortgage and asset-backed securities for Nomura and Sandler O’Neill.

Self-management transition completed
Two Harbors Investment Corp has completed its transition to self-management, following the termination of its management agreement with PRCM Advisers on for cause (SCI 22 July). No termination fee was payable to PRCM Advisers in connection with the termination. The company has directly hired its strong and experienced senior management team, along with the other personnel who have historically provided services to Two Harbors. It has also completed the transition of the functions necessary to continue to operate its business without interruption.

Structured Finance

Seasoned QMs proposed

Sector developments and company hires

Seasoned QMs proposed
The CFPB has issued a notice of proposed rulemaking (NPRM) to create a new category of seasoned qualified mortgages, with the aim of encouraging innovation and to help ensure access to a responsible, affordable mortgage credit market. To be considered a seasoned QM under the proposal, loans would have to be first-lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period.

Covered transactions would also have to be held on the creditor’s portfolio during the seasoning period, comply with general restrictions on product features and points and fees and meet certain underwriting requirements. For a loan to be eligible to become a seasoned QM, the proposal would also require that the creditor consider and verify the consumer’s debt-to-income ratio or residual income at origination. Seasoned QMs would only be available for covered transactions that have no more than two 30-day delinquencies and no delinquencies of 60 or more days at the end of the seasoning period.

In other news…

CLO print delayed
Citi has resigned as lead arranger on the US$400m Battalion XVIII CLO, which was due to price yesterday, amid a disagreement with the CLO manager – Brigade Capital Management – in connection with a US$900m payment the bank accidentally made to Revlon lenders. Brigade, along with HPS Investment Partners and Symphony Asset Management, has reportedly declined to return the cash and a federal judge has issued court orders freezing the assets.

EMEA
Aon has launched a new capital partners team in its reinsurance solutions business that will deliver additional sources of capacity to clients to help them to lower their cost of capital, reduce volatility and seize new opportunities for growth. Initially, the team will bring third-party property catastrophe capacity to clients in London, Bermuda, Europe and Asia. Eventually, the team will expand into other business lines and regions.

Richard Wheeler will lead the capital partners team, supported by Anshuman Srivastava as deputy head, both reporting to Nick Frankland, UK ceo of Reinsurance Solutions, and Paul Schultz, ceo of Aon Securities. These individuals have taken on these roles in addition to their existing roles.

North America
Aeolus Capital Management is set to appoint Nicholas Jagoda as a partner and portfolio manager after he fulfils his obligations with Elementum Advisors, where he is currently a partner and portfolio manager. Jagoda was part of the original team that launched Elementum in 2009 and played a key role in the subsequent founding of Elementum (Bermuda) in 2011.

BSI Financial Services has promoted two of its key leaders, John Lawrence and Larry Goldstone. Lawrence has been named president of servicing and lender services, while Goldstone has been named president of capital markets and lending.

Paul, Weiss, Rifkind, Wharton & Garrison has appointed Charles Pesant as a partner in its corporate department and the securitisation practice group, based in the New York office. Pesant focuses his practice on highly complex domestic and cross-border structured finance deals. He was previously a partner at White & Case.

Reporting templates updated
ESMA has published updated securitisation reporting instructions and XML schema (version 1.2.0) for the templates set out in the technical standards on disclosure requirements, which will enter into force 20 days after they have been published in the Official Journal of the EU. The updates address technical issues identified by stakeholders since December 2019. In order to facilitate the smooth implementation of these updates, reporting entities may choose to use version 1.1.0 or version 1.2.0 of the XML schema and validation rules until 1 February 2021. As of that date, reporting entities may only use the latest version, version 1.2.0.

‘True lender’ cases settled
Colorado Attorney General Phil Weiser has settled two precedent-setting lawsuits involving Colorado’s right to enforce its interest rate limits on consumer loans to protect residents from predatory lending practices. The AG had alleged that Avant and Marlette illegally partnered with two out-of-state banks - WebBank and Cross River Bank respectively - in a scheme to “rent” those banks’ ability to lend above Colorado’s rate limits.

Under the settlement, WebBank, Cross River Bank and all of their non-bank partners - including Avant and Marlette - have agreed to provide Colorado consumers with certain protections to ensure that they are making true banks loans. Additionally, they committed that they will not lend to Colorado consumers at rates above 36% and will provide consumers with other protections required by Colorado law. In addition, non-bank partners will maintain a Colorado lending license.

The companies will pay US$1.05m to the State of Colorado for consumer protection efforts consistent with the settlement agreement. Furthermore, the companies will make a US$500,000 contribution to the MoneyWi$er programme, a partnership between the AG’s office and the Colorado Department of Education that supports K-12 financial education in Colorado.

Capital Relief Trades

SSRT trio revealed

Sector developments and company hires

SSRT trio revealed
S&P has published its ratings and research on three previously privately-rated risk transfer RMBS issued by Freddie Mac, at the issuer's request. The trio of deals are STACR Single-Seller Risk Transfer (SSRT) Series 2019-CS02 (sized at US$245.2m and closed in March 2019), 2020-CS01 (US$578.36m; April) and 2020-CS02 (US$190.78m; July). The transactions transfer a portion of the risk in Freddie Mac’s mortgage asset portfolio to private investors, as mandated by the FHFA.

Reference obligations in Freddie Mac's credit risk transfer transactions that were refinanced under the Enhanced Relief Refinance (ERR) programme have historically been treated as prepayments. As such, they were removed from the reference pool and the notes were paid down accordingly.

Uniquely, in the SSRT deals, a reference obligation that refinances under the ERR programme may be replaced with the new reference obligation created under the ERR programme. Since the reference obligation would be replaced with the ERR reference obligation instead of being considered a prepayment, there would be no associated amortisation or pay-down of the CRT notes.