Lone Star Funds is planning to issue the first rated bonds backed by mortgages to borrowers with weaker credit since the 2008 financial crisis, according to Fitch Ratings.
The bonds are supported by $161.7 million of mortgages, according to Fitch. The borrowers have credit scores a bit lower than prime on average, and the bonds carry extra risk because, for example, the homeowner may have high levels of debt compared to income, the ratings company said. Borrowers for about 47 percent of the debt had a prior credit problem, such as having filed for bankruptcy or gone through foreclosure.
Fitch said it expects to assign credit ratings as high as A to the bonds. Credit Suisse will underwrite the offering.
The deal represents the latest small step in the slow recovery of the private-label mortgage-backed securities market, which swelled to bubble proportions a decade ago before bursting in 2008 when markets seized up over concerns about the quality of the collateral in the loans.
Since the crisis, most mortgage bonds that have been issued have had government backing. Outside of those, the majority have been backed by old, soured debt or big loans made to the wealthiest Americans. Wall Street has been trying to change that by testing the waters for new deals.
The Lone Star deal is designed "to provide credit to underserved borrowers and increase homeownership amongst borrowers who are locked out of the agency mortgage process," company spokesman Joe Sala said in a statement.
Justin Perras, spokesman for Credit Suisse declined to comment.
The ratings company said it evaluated the bonds using the framework it previously used for "Alt-A
" home loans
, with some variations based on the mortgages. Alt-A loans were common before the housing bubble burst, and were non-prime mortgages whose borrowers may have had relatively high credit scores but didn’t qualify for home loans that could get packaged into government-backed mortgage bonds.
Many, for example, were small-business owners that couldn’t document their income because they kept much of their earnings at their companies to reduce their personal income taxes.
Lone Star’s offering, which is called called COLT 2016-1 Mortgage Loan Trust, differs from the kind of subprime-mortgage bonds sold leading up to the crisis in a number of ways, said Fitch’s Sandro Scenga.
Fitch noted that 100 percent of the underlying loans were made after income was documented, he said. All of the loans have also undergone a third-party, due-diligence review, and were underwritten to meet the standards required by a new law called the Ability-to-Repay rule.
Lone Star will retain at least 5 percent interest in the deal, the Fitch report said, ensuring that sellers of such mortgage bonds keep "skin in the game" and will suffer along with investors if the debt goes bad.
These new protections come as banks worldwide struggle to restore investor confidence as sanctions for misconduct mount amid probes into foreign-exchange rigging and the mis-selling of mortgages and associated products on both sides of the Atlantic. Macquarie Group Ltd. estimates litigation has cost banks more than $170 billion globally since 2008