Kroll Bond Rating Agency (KBRA) has assigned preliminary ratings to five classes of mortgage reference notes from Western Mortgage Reference Notes, Series 2021-CL2 (WAL 2021-CL2), a credit-linked note transaction issued by Western Alliance Bank (“WAB”).
This is the first such rated issuance by WAB and the second credit-linked note issuance by the bank. The issued notes are unsecured general obligations of WAB and the issuance is designed to transfer credit risk on a reference pool of mortgage assets (the Reference Obligations) owned by WAB. The Reference Obligations consist of a pool of 5,554 mortgage loans with an unpaid principal balance of over $4.5 billion as of Nov. 30, 2021. The Offered Notes will be paid principal only to the extent actual principal payments are made on the reference obligations.
KBRA assigned the following preliminary ratings:
- M-1,M-2: A-
- M-3: BBB
- M-4: BB
- M-5: B
- A-R1, B: Not rated
KBRA’s rating approach incorporated loan-level analysis of the mortgage reference pool through its KBRA RMBS Credit Model, an examination of the results from third-party loan file due diligence, cash flow modeling analysis of the transaction’s payment structure, reviews of key transaction parties and an assessment of the transaction’s legal structure and documentation.
The Reference Obligations were originated and are serviced by a number of underlying loan originators and servicers. The loans vary in credit quality and cover a varying spectrum of risk, including primarily prime, agency-eligible and agency “near miss” loans, some of which are for non-owner occupied investor properties.
The WAL 2021-CL2 Reference Pool consists of prime quality borrowers with fully-documented income and predominantly 30-year, fully-amortizing, fixed-rate mortgages (FRMs). The orrowers in WAL 2021-CL2 have a weighted average (WA) original credit score of 766 and a WA debt-to-income (DTI) ratio of 33.5%, which are generally consistent with prime-quality underwriting.
The known non-QM loans in this pool are of generally high quality, with features such as interest only periods and greater than 43% DTI ratios as reasons for the non-QM status, but with features otherwise typical of prime quality loans. Although a majority of the loans qualify for QM status, approximately one-fourth of the population may have some characteristics which fall under non-QM classification. Significantly, all still display generally prime credit characteristics.
The non-QM loans have a weighted average (WA) original credit score of 759 and a WA debt-to-income (DTI) ratio of 40.4%. There is notable borrower equity in the properties collateralizing these mortgages, which is reflected in the WA original loan-to-value (LTV) ratio of 64.6%. The level of equity provides a substantial margin of safety against potential home price declines, while the pool’s FICO scores, DTI ratios and income generally display strong borrower credit quality.
You can read KBRA's full report on its website, www.kbra.com (registration required).