Non-qualified mortgages in the transaction secures AAA ratings from S&P
Ellington Financial Inc. has finalized a $288 million securitization backed by non-qualified residential mortgage (non-QM) loans.
The company contributed about 83% of the loans in the securitization, with the rest supplied by Ellington Management Group.
The securitization involved several debt tranches, with the senior-most tranches receiving AAA(sf) ratings from S&P Global Ratings. According to its press release, Ellington has retained certain tranches in line with US and EU credit risk retention rules. They also hold the option to call the securitization anytime after the optional redemption date, offering flexibility for future financial maneuvers.
Ellington Financial's investment portfolio spans a wide range of financial assets, including residential and commercial mortgage loans, mortgage-backed securities, reverse mortgages, and other related investments. The company also holds consumer loans, asset-backed securities, collateralized loan obligations, and equity stakes in loan origination firms.
The securitization comes as yield-seeking insurance companies increasingly shift their focus from traditional mortgage-backed securities to buying whole loans outright.
This strategy offers better yields but comes with added complexities that require a certain level of expertise and capacity, which only larger firms like Apollo Global Management Inc. and KKR & Co. can typically manage.
Ellington Management Group reported that insurers boosted their residential mortgage loan holdings by about $20 billion last year, an increase of 45%. These loans typically don't meet the standards required for securitization by government-sponsored entities like Fannie Mae or Freddie Mac, often making them riskier.
Read more: Insurers buy mortgages outright in new twist
In other news, S&P Global Ratings recently reviewed 51 ratings from nine US RMBS non-QM transactions. The review resulted in 26 upgrades and 25 affirmations, reflecting strong credit performance across the board.
"The upgrades primarily reflect deleveraging," noted S&P, as these tranches benefit from increased credit support.
S&P's review involved a detailed analysis of loan-level data, assessing foreclosure frequency, loss severity, and loss coverage. They also examined transaction-specific factors such as delinquency trends, loan modifications, and credit enhancement to determine the rating adjustments.
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