EverBank Joins JPMorgan as Mortgage-Bond Issuer Revival DoublesJody Shenn
EverBank Financial Corp. and JPMorgan Chase & Co. are planning to sell securities backed by $924 million of new U.S. home loans without government backing in deals that would double the number of issuers in the so-called non-agency market since the debt caused a global crisis.
EverBank, whose home-loan unit is run by Tom Wind, the former head of residential lending at Lehman Brothers Holdings Inc., is issuing bonds backed by $308 million of loans, Fitch Ratings said in a report. JPMorgan, the largest U.S. bank, is planning a $616 million transaction, the credit grader said.
Both sets of bonds are tied to large, “high quality” loans to borrowers with more than 30 percent equity in their homes on average, according to separate presale reports by Fitch, which said the deals had other risky features.
Issuance in the non-agency market is rising after the size of mortgages that government-supported Fannie Mae and Freddie Mac can finance fell and their bond-guarantee fees increased, while investors flock to assets with potentially higher returns as the Federal Reserve suppresses yields on notes with less default risk.
Credit Suisse Group AG last year joined Redwood Trust Inc. as the only issuers since the market revived in 2010. They have completed deals backed by about $2.1 billion of new mortgages this year, compared with $3.5 billion in all of last year, according to data compiled by Bloomberg. Sales peaked at $1.2 trillion in both 2005 and 2006 before collapsing as prices tumbled amid soaring foreclosures and plunging real-estate values, sparking a global financial crisis in 2008.
Michael Cosgrove, a spokesman for Jacksonville, Florida-based EverBank, declined to comment. Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, didn’t return a telephone message seeking comment on its transaction.
JPMorgan’s bonds are made riskier by the bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch said yesterday in an e-mailed report.
Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the housing collapse.
The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan-breach liability and the inclusion of sunsets for a number of provisions including fraud,” New York-based Fitch analysts including Roelof Slump wrote in a report.
The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report.
That compares with so-called credit enhancement, created by items such as other bonds being first in line to absorb losses from the underlying loans, of 7.05 percent in a Credit Suisse deal in February and 6.5 percent in a transaction last month by Redwood, according to data compiled by Bloomberg.
EverBank’s securities that may get AAA ratings from Fitch carry 8.2 percent credit enhancement, according to a separate report.
The ratings firm said it took into account the risks posed by the lender not being strong enough financially to count on for repurchases. EverBank also has a “limited track record” in the market, and approximately 37 percent of the underlying borrowers have mortgages on two or more properties, Fitch said.
The JPMorgan securities are backed by loans with average balances of $819,495, while the EverBank bonds are tied to mortgages averaging $805,302, according to Fitch. That suggests that the loans are so-called jumbo mortgages as such big debts dominate the revival in the non-agency bond market led by Redwood and Credit Suisse.
Jumbo home loans are larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in some areas. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments, limits range from $417,000 to $625,500, down from as much $729,750 in 2011.
Kroll Bond Rating Agency plans to assign similar grades to the JPMorgan bonds as Fitch, according to a report yesterday.
While it also saw the representation and warranty provisions as a “credit negative,” those features were mitigated by the debt’s high quality and reviews of all of their files by a third-party firm, Kroll said in its presale report.
“If similar provisions were present in a transaction that had lower-quality collateral, was subjected to less robust third-party diligence review or had a higher proportion of originators that were potentially financially weaker, Kroll Bond Rating Agency might forecast higher expected loss levels or consider a downward adjustment of its ratings,” the firm said.