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Goldman Sachs Launches First Jumbo Mortgage Bond Since Crisis

  

housingwire.com | November 28, 2014 

By Ben Lane

One of the most notorious names from the mortgage crisis is back. And they’re back in a big way.

Goldman Sachs (GS), which was at the forefront of the toxic mortgage crisis that nearly crippled the U.S. economy, is preparing to launch its first post-crisis prime jumbo residential mortgage-backed securitization.

Goldman recently agreed to pay $3.5 billion to buy back residential mortgage-backed securities from the Federal Housing Finance Agency, resolving claims stretching back to 2005.

With that settlement behind it, Goldman is now ready to return to the market with its first jumbo RMBS since the crisis.

The offering, called Goldman Sachs Mortgage-Backed Securities Trust 2014-EB1, is backed by 366 first-lien, residential mortgage loans with an outstanding principal balance of $282,800,740. The average loan balance in the offering is $772,680.

The collateral pool is split into two groups, both of which contain hybrid adjustable-rate mortgages with 30-year terms. The difference between the two pools is their respective initial fixed-rate periods.

The first pool contains 59 loans that are 10-year hybrid ARMs. The first pool represents 16.4% of the total balance.

The second pool contains 307 loans that are 7-year hybrid ARMs. The second pool represents 83.6% of the total balance.

Approximately 7.9% of the total mortgage loans have a 10-year interest-only period.

Kroll Bond Rating Agency issued a presale report for the offering, awarding AAA ratings to most of the offering’s tranches, including the largest one.

According to KBRA’s presale report, “the aggregate pool is characterized by substantial borrower equity in each mortgaged property.”

The underlying loans carry weighted average loan-to-value and combined LTV ratios of 69.3% and 70.0%, respectively. The WA CLTV incorporates 5.4% of the pool possessing known junior mortgages, KBRA said. The pool’s WA original and current credit scores are 770 and 760, respectively, which are within the prime mortgage range.

According to Kroll’s report, EverBank (EVER) originated 100% of the loans and will act as the servicer as well. “EverBank has significant experience as a jumbo mortgage lender and servicer,” KBRA said in its presale report. “Its securitized loans have historically performed slightly better than the industry average for similar quality loans.”

KBRA noted the high quality of the underlying borrowers as a positive of the deal. “A significant number of borrowers retained abundant liquid reserves, with an average of approximately $296,200,” KBRA said.

“In addition, the loans demonstrate prudent debt-to-income ratios especially given relatively high borrower incomes, with a WA DTI for the pool of 33.3%. Borrower income and assets have been well-documented and verified.”

Considering that all of the underlying mortgages have adjustable-rates, KBRA cautions on the potential for payment shock when borrowers’ rates reset.

“Mortgage products that include adjustable interest rates or IO features expose borrowers to the risk of fluctuating or increasing monthly payment obligations, which can result in payment shock,” KBRA said.

“The payment shock to the borrower for hybrid ARMs and IO loans can be significant, particularly in a historically low interest rate market. In such an environment, rate increases are likely and refinancing opportunities may be limited.”

To combat the potential of payment shock, KBRA said that it increased the expected default rate in the AAA tranches to 18.5%.

KBRA also cautioned on the geographic concentration of the offering. As with most jumbo securitizations, a large portion of the offering is located in California.

“GSMBS 2014-EB1 has significant geographic concentration in California (49.4%), specifically in the Los Angeles (16.4%), San Jose (12.8%), and San Francisco (12.7%) Core Based Statistical Areas,” KBRA said. “KBRA’s methodology results in ‘AAA’ expected losses that were adjusted upward by 19.2% from the loan-level model results to account for the geographic concentration in this pool.”

KBRA also cautions on the size of some of the loans, relative to the total pool amount. “While the terms and underwriting of such loans may generally be conservative, they still present risk in the context of a pool where a single such loan may comprise close to 1% of the pool balance,” KBRA said. “Loan-level models are derived from analyzing a large universe of loans, and such models work best when applied against pools with a large number of loans of relatively uniform size. For smaller pools with outsized loans, the risk of ‘outlier’ loss events grows.”

In GSMBS 2014-EB1, there are six loans that have balances greater than $2 million. The largest of which is $2.65 million, which represents nearly 1% of the entire pool.

 

Back to November 2014 Archive

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