Redwood Trust sells new round of mortgage-backed securities

Redwood Trust, a loan securitizer in Mill Valley, Calif., sold $290 milllion in securities backed by prime jumbo residential mortgage loans to institutional investors in a public offering March 1 that was handled by underwriters Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC, and Jefferies & Company, Inc.

Senior securities representing 92.5 percent of the offering were rated AAA by credit rating agency Fitch Inc., according to a Redwood Trust announcement.

Redwood’s sale was its second since 2008. Redwood is the only company that has successfully secuitized jumbo home loans since the market collapsed in 2008, according to the National Mortgage News. Redwood executives saw the sale as proof that a privatized mortgage market can be successful. But the National Mortgage News reported little sign that other securitizers are preparing an offering, although Bank of America/Merrill Lynch, Deutsche Bank, Goldman Sachs and PIMCO are thought to be considering it.

RepoWatch tracks securitization because financial institutions often use the securities as collateral for repo loans. The credit crisis in 2007 and 2008 occurred when repo lenders panicked about the quality of their mortgage-backed collateral and stopped lending. Experts are debating whether to revive securitization and how to make it safe.

From the National Mortgage News:

According to correspondent buyers of jumbo loans, the biggest stumbling block to creating new securities is a lack of available product. Both megabanks and regionals are actively funding jumbos, but many institutions have chosen to place these assets on balance sheet rather than sell because the “spread” between their cost of funds and the note yield is so wide. …

Redwood does not fund mortgages directly and instead must rely on correspondent loan purchases from jumbo originators, including depositories. Its first jumbo deal—which was oversubscribed—was comprised mostly of loans originated by Citigroup. This time around it’s unclear which lenders have been upstreaming product to the Mill Valley, Calif.-based firm.

Martin S. Hughes, Redwood’s President and CEO, said in a press release:

This transaction marks another step toward re-opening the private mortgage securitization market and supports the Treasury Department’s recent finance reform proposal that calls for the private market to become the primary source of mortgage credit for the U.S. housing market.

This transaction also supports our belief that triple-A investors will provide attractive financing for prime residential mortgages provided their demands for enhanced disclosure transparency, alignment of interests, high quality collateral, and structural protections are responded to with improvements in these areas….

The pricing of this securitization transaction suggests that fears of residential mortgage rates rising by 100 to 150 basis points unless there is government backing through Fannie Mae or Freddie Mac appear to be unfounded.


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