Mello Mortgage, 2022-INV2, prepares to issue $442 million in MBS

The Mello Mortgage Capital Acceptance 2022-INV2 is preparing to issue about $442 million in residential mortgage-backed securities (RMBS), from a trust fully secured by qualified mortgages on investment property.

Mortgage borrowers’ debt-to-income ratios were used to underwrite the loans, according to S&P Global Ratings, which plans to rate the notes. None of the loans were in forbearance at the cutoff date, March 1. J.P. Morgan Securities and Raymond James & Associates will be initial note purchasers, in a deal that will issue and repay the notes through a senior-subordinate, shifting-interest structure with a five-year period.

Mello Credit Strategies will sponsor the deal, for which 1,094 first-lien, fixed-rate and fully amortizing mortgage loans secured by mostly one- to four-family residential properties will serve as collateral. Single-family homes represent the plurality of the pool balance, 36.5%. Other properties include planned-unit developments, 26.3% and condominiums, 12.3%.

On a weighted average (WA) basis, the mortgage pool has a FICO score of 762, and a combined loan-to-value (LTV) ratio of 66%, and a debt-to-income ratio of 36.9%. S&P said.

Self-employed borrowers accounted for 29.8% of the pool, while loans with co-borrowers accounted for 39.9% and loans to borrowers with multiple borrowers represented 9.8% of the pool. Just 3.6% of mortgages in the pool were extended to foreign borrowers.

On average, the loans have a balance of $404,118. About 40.8% of the mortgages were taken out for purchase, and almost the same amount, 40.2%, were done for cash-out refinancing. The ‘AAA’ loss coverage requirement for the pool was determined to be 10.1%.

Principal and interest payments will be made concurrently and distributed to the senior and subordinate certificates, depending on their payment priority, said S&P. The rating agency expects the deal to close on March 31.

S&P plans to assign ratings very high ratings on the notes, ranging from ‘AA+’ on the $390 million A-1 notes to ‘AAA’ on the $37 million A-8 notes.

The credit strength of the borrowers notwithstanding, S&P noted several factors that could weaken Mello 2022-INV2. The base servicing fee reduces available funds, but the more subordinate bonds could be more susceptible to interest shortfalls. Also, the rating agency applied an occupancy-related adjustment factor of 1.5x to its loss estimates, because all of the loans are backed by investment properties.