Business Context and Reporting Period
Company: Chimera Investment Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: May 31, 2016
Event: Acquisition and securitization of seasoned residential mortgage loans.
Key Financial Metrics and Transaction Details
- Acquisition Size: Approximately $3.5 billion in unpaid principal balance of seasoned residential mortgage loans.
- Securitization Structure: Two identical transactions (CIM 2016-2 and CIM 2016-3).
- Securities Sold: Approximately $3.0 billion in aggregate balance sold to institutional investors via private placement.
- Senior Securities: Represented ~70% of capital structures with an initial coupon of 2.94%.
- Retained Interests: Approximately $537 million in subordinate interests (including eligible horizontal residual interests).
- Funding Sources: Available cash, proceeds from the sale of ~$1.9 billion in Agency mortgage-backed securities, and recourse financing.
- Expected Expenses: Approximately $13 million in aggregate expenses for the second quarter related to these transactions.
- Balance Sheet Impact: Expected net increase in total GAAP assets of approximately $3 billion due to consolidation of mortgage loans.
Material Changes Versus Prior Period
As of March 31, 2016, compared to the projected impact of these transactions:
- Total Leverage: Expected to increase from 4.0:1 to 5.2:1.
- Total Recourse Leverage: Expected to decrease from 2.6:1 to 2.3:1.
Outlook, Management Commentary, and Risks
Management Commentary: The Company retained an option to call outstanding notes in each securitization beginning in May 2020. Substantially all retained interests in CIM 2016-1, CIM 2016-2, and CIM 2016-3 are subject to credit risk retention rules.
Risks and Contingencies: The filing includes standard forward-looking statement disclaimers. Key risks cited include:
- Changes in interest rates and market value of assets.
- Credit losses, default rates, and recovery rates on underlying mortgages.
- Declines in home prices.
- Ability to maintain REIT qualification and manage leverage.
- Operational risks related to third-party sub-servicers and foreclosure practices.
Investor Verification Checklist
- Verify the exact composition and credit quality of the $3.5 billion loan pool acquired.
- Confirm the final leverage ratios post-consolidation in the next quarterly report (10-Q).
- Monitor the $13 million in expected Q2 expenses and their impact on net income.
- Review the terms of the recourse financing used to fund retained interests.
- Assess the impact of credit risk retention rules on the $537 million retained interest.