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Loans from mortgage REIT's shuttered conduit highlight $1.03B JPMorgan RMBS deal

A significant number of loans previously associated with the former mortgage conduit business of Two Harbors Investment Corp. have found their way into a securitization pool, albeit not one sponsored by the mortgage REIT.

Moody's said in a presale report for the $1.03 billion J.P. Morgan Mortgage Trust 2017-1 that the underlying pool included a number of prime jumbo nonconforming mortgages acquired by JPMorgan Chase & Co. unit J.P. Morgan Mortgage Acquisition Corp. directly and indirectly from Two Harbors' TH TRS Corp.

Approximately 18.8% of the transaction included loans aggregated by the Two Harbors subsidiary and then acquired by J.P. Morgan Mortgage Acquisition Corp. through Central Clearing and Settlement LLC, a unit of MAXEX LLC. Another 7.3% of the deal involved loans acquired directly from TH TRS Corp. The Two Harbors loans were originally sourced and aggregated from 31 sellers, Fitch Ratings said in its presale report.

MAXEX said on its website that it is a financial services technology company that has developed a multiseller to multibuyer residential mortgage exchange through which it acts as the central clearinghouse and single counterparty to all participating buyers and sellers. Moody's reported that the transaction is the first on the J.P. Morgan Mortgage Trust platform to include a large percentage of loans that it purchased through a loan exchange.

"Overall, the credit quality of the Two Harbors mortgage loans, whether acquired directly from TH TRS Corp. or indirectly through MAXEX, is strong and consistent with the Two Harbors mortgage loans included in the Agate Bay Mortgage Trust 2016-2," Moody's said.

Two Harbors confirmed during a Feb. 7 conference call that it completed the closure of the conduit business in a manner consistent with a previously issued timeline and expense expectations. The mortgage REIT announced plans to shut it down in July 2016, citing the impact of a challenging market environment on its ability to bring the business up to scale and skepticism that conditions would change anytime soon.

"We have redeployed the capital to other areas of our business that we believe will generate higher returns, namely MSR [assets] and commercial real estate lending," Two Harbors President and CEO Thomas Siering said during the call. "Additionally, we expect to realize the cost benefits related to this wind-down and believe this will help our overall efficiencies in the years ahead."

Two Harbors completed the sale of substantially all of its remaining portfolio of prime jumbo loans during the fourth quarter of 2016, the mortgage REIT said. It conducted its third and final securitization of 2016 in August, the $376.6 million Agate Bay Mortgage Trust 2016-3.

Peer mortgage REIT Redwood Trust Inc. closed a $342.9 million prime jumbo RMBS deal through its Sequoia Mortgage Trust platform in January, and a second deal backed by $347.8 million of prime jumbo loans is expected to close on or about Feb. 17.

The largest source of the loans in the J.P. Morgan Mortgage Trust pool was not Two Harbors but rather JPMorgan Chase Bank NA. Moody's said the bank's loans, which had been underwritten to conform to Fannie Mae and Freddie Mac guidelines, accounted for 36.3% of the pool. The rating agency likened that paper, which it described as having a high average current loan balance at nearly $516,000 relative to typical conforming pools where the average is approximately $230,000, to the high-balance loans underlying certain Freddie Mac Whole Loan Securities Trust transactions.

Fitch noted that the deal is the first since the J.P. Morgan Mortgage Trust platform's inception to include agency-eligible collateral. The platform has completed 19 private-label RMBS deals since 2013, the rating agency said.

Other originators of the nonconforming loans in the pool include Quicken Loans Inc., United Shore Financial Services LLC and New York Community Bancorp Inc.

J.P. Morgan Mortgage Trust 2017-1 is expected to close at month's end.