In the third mortgage transfer certificate issuance this year by sponsor Imperial Fund II, Imperial Fund Mortgage Trust 2021-NQM3 reduced the percentage of five-year hybrid ARMs in the collateral pool to 0.2%.
Five-year ARM hybrid mortgage performance is lowest since Imperial 2020-NMQ1 hit the market, with a nearly equal 51.9% allocation of fixed rate mortgages at 45.1 % of guarantee pool, according to DBRS Morningstar, which expects to evaluate ratings. Since then, the 2021-NMQ1 had a concentration of 25.2% in five-year hybrid ARMs, and then 4.0% in the 2021-NMQ2 Imperial.
The current agreement uses a capital structure virtually identical to that of 2021-NMQ2, with three categories of senior notes with ratings “AAA” through “A”, which will pay on a pro rata basis; a mezzanine room, class M-1, classified “BBB”; and three subordinate categories to be paid sequentially, according to DBRS.
As of the October 1 deadline, around 63% of collateral is considered non-QM, according to CFPB rules on qualified mortgages / repayment capacity, while around 37% of loans have been made to investors. for commercial purposes, and not subject to QM / ATR rules.
DBRS noted that the portfolio contained mortgages made to borrowers with weaker credit. In the current pool, loans have a weighted average (WA) debt service coverage ratio (DSCR) calculated by the issuer of 1.25x.
Only 4.8% of the pool was complete documentation with only 4.8%. Mortgages taken out using bank statements made up 44.6% of the pool, while loans taken out with DSCR documentation made up 27.7%. DSCR loans are generally given to experienced investors who intend to lease and manage properties.
For investor loans, DBRS applies a penalty of 1.7x to 1.8x on the frequency of default, compared to owner-occupied loans. The rating agency applies an additional penalty to DSCR loans that have been taken out using real estate cash flow or rental income to help borrowers meet income qualification requirements.
DBRS said it applied loan level factors to probabilities of default (POD) based on each mortgage loan’s DSCR, loan-to-value ratio, and FICO score. Finally, the DSCR calculated by DBRS for loans is 1.12x.
The basin is not very diverse geographically. Based on current loan balances, three states accounted for 86.1% of the pool. Florida had the highest concentration, at 47.9%; California followed with 20.9% and New York with 17.2%.