JPMorgan Chase gets into the DSCR MBS game

JPMorgan Chase will soon be issuing its first non-prime MBS secured exclusively by investor loans that are underwritten based on rental income.

JPMorgan Mortgage Trust 2022-DSC1 is secured by 980 debt service coverage ratio (DSCR) loans with a balance of $308.2 million, according to a Kroll Bond Rating Agency presale report. The collateral has seasoned for just under 12 months, the report says.

Though the loans were originated by more than 100 lenders, non-QM entity Sprout Mortgage, which crashed and burned in July, has the largest share or originations at 19.9%. Chicago-based Interfirst Mortgage Company originated 11% of the loans in the pool. No other originator issued more than 10% of the pool.

The relative strength of DSCR

The JPMorgan Chase MBS offering highlights the relative appetite investors have for business purpose loans, at least in comparison to agency loans.

In its November report, mortgage trading platform MAXEX wrote that agency-eligible investor transactions have “dissipated dramatically over the last six months,” with a second-straight month of zero issuances coming in October.

But “investment properties across the product spectrum have remained popular among non-agency lenders and investors alike,” the MAXEX report reads. “Investment property loans—jumbo, conforming or DSCR—have represented greater than 25% of MAXEX lock volume for 3 consecutive months. Continued strength in the rental market, punitive LLPAs from the
Agencies and the continued growth of short-term rentals such as AirBnB and VRBO all contribute to this trend.”

Since the higher LLPAs on investor properties came into effect, MAXEX buyers introduced two DSCR programs and the exchange started to see more volume of non-owner occupied loans flow through the conforming offering, MAXEX said.

There are still many headwinds in the space, including wide spreads and volatility.

Redfin also reported that companies bought roughly 66,000 homes in 40 markets it tracks in the third quarter, down about 30% from 94,000 homes during the same period last year. It was the biggest percentage decline in investor purchases since the subprime crisis (excepting the early part of the pandemic when restrictions were in place).

Rent growth has also slowed to 10.1% on single-family homes in September, down from 13.9% in April, according to CoreLogic.

The offering

In its pre-sale report, KBRA noted that the average borrower’s FICO score was “moderately strong” at 740, with the current average loan-to-value ratio at 68.4% and the average DSCR at 1.41. DSCR loans are underwritten to account for rental income on a property and do not factor the borrower’s income into the equation.

For this pool, about 20% of the loans are geographically concentrated around New York City, and other high concentrations are in Miami, Los Angeles, Baltimore/D.C. Dallas, and Atlanta. The loans are primarily backed by single-family residences (62.14%), two- to four-family homes (33.8%), and condominiums (4.07%).

KBRA analysts noted that 63% of the loans are collateralized by properties with leases in place and said that JPMorgan has provided representation and warranty coverage for the loans originated by Sprout.

“These loans, along with the rest of the loans in the transaction, underwent a full scope due diligence review with satisfactory outcomes and meet the Sponsor’s Acquisition Guidelines,” KBRA analysts wrote. “In addition to the Sponsor has demonstrated extensive RMBS securitization performance history though this is mainly in relation to prime jumbo loans. This transaction represents the first securitization by the Sponsor backed by investor cash flow loans.”

The highest tranche received a AAA bond rating by KBRA, with a credit enhancement of 34.4%.

“Investor properties generally exhibit a higher propensity of default than owner-occupied properties. Their performance may depend on certain aspects of a property’s rental market (e.g., vacancy rates, market rent trends, regional prices), as well as the borrower’s capacity and motivation to manage multiple properties, generate sustainable cash flow and maximize recoveries,” KBRA analysts wrote. “Additionally, alternative doc types (e.g., DSCR) have historically exhibited higher delinquency and default risk relative to loans underwritten using traditional income qualification (i.e., 1-2 years of tax returns/W2s). These potential risks for JPMMT 2022 DSC1 are partially mitigated by the underlying pool’s moderate leverage ratios and relatively solid credit scores.”

In another presale report, analysts at S&P Global weighed whether there were any additional risks related to foreclosure and liquidation timelines for investor properties compared to owner-occupied properties.

“We considered the variance in foreclosure and liquidation timelines and determined that the delta of timelines between investor and non-investor properties did not pose an additional risk to the pool,” the analysts wrote.

Shellpoint Mortgage Servicing, a division of NewRez, and Nationstar (Mr. Cooper) are functioning as the primary servicer and master servicer, respectively.

The loan purpose for 478 loans (just over 50% of the pool balance) is a cash-out refinance, with an average cash-out amount of $148,308 (114 loans have cash-out amounts greater than $200,000).