Photographer: Brett Gundlock/Bloomberg

AAA Grades Return for Securities Backed by Riskier Mortgages

Updated on
  • More than $210 million of the home-loan bonds to be sold
  • Bonds backed by mortgages made by Lone Star unit, and others

Two ratings firms are assigning AAA grades to bonds backed by riskier, recently made home loans, one of the few times since the financial crisis that such securities have won top marks.

Fitch Ratings and DBRS Inc. are giving ratings to more than $210 million of bonds backed by loans made by Caliber Home Loans, a unit of Lone Star Funds, and by mortgages from Sterling Bank & Trust and LendSure Mortgage Corp, according to documents obtained by Bloomberg. The bonds are partially backed by home loans in which a lender verified a borrower’s income with bank statements rather than tax returns. Another ratings firm, Moody’s Investors Service, recently called out those types of mortgages as risky.

Most of the loans backing the bond are not qualified mortgages, meaning they do not adhere to U.S. government guidelines designed to give borrowers extra protections against their lenders. Those guidelines include how much debt a borrower can have.

The top grades on these bonds may be a sign that big Wall Street firms and lenders are becoming comfortable again with riskier home borrowers. Lone Star had hired Fitch and DBRS for a similar mortgage-bond sale earlier this year and received credit ratings as high as A. 

A Lone Star spokeswoman referred to ratings commentary offered by DBRS. A spokesman for Fitch didn’t immediately respond to an e-mail seeking comment.

The credit scores for the borrowers are on average 712, a prime level, Fitch wrote in a report. More than half of the loans were made to borrowers in California, a state that accounts for about 12 percent of the U.S. population. When grading the bonds, Fitch used criteria that it had designed for mortgages known as “Alt-A,” a type of loan that was common before the U.S. housing crisis. They include debt taken out by borrowers who did not prove regular income, because for example, they owned a small business that generated irregular earnings.

Since the crisis, apart from government-backed home loans, mortgage-bond issuance has been limited mainly to bundling old, soured debt or big loans made to wealthy individuals. A 2011 deal with top ratings included loans that were on average five years old. The Lone Star unit is one of a handful of companies trying to test broader investor appetite for riskier mortgage credit.

About 71 percent of the loans in the latest transaction were made by the Lone Star unit, and 22 percent were made by Sterling Bank & Trust. LendSure made about 6.5 percent of the loans. Ellington Financial REIT was an initial investor in LendSure’s mortgages, but it sold the loans to an affiliate of Lone Star, according to a term sheet obtained by Bloomberg.

Credit Suisse is the lead underwriter on the bond sale. A spokesman for Credit Suisse declined to comment.

(Updates with information about borrowers in sixth paragraph, information about prior deal in seventh paragraph.)
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