IFR-Sequoia deal bolsters case for RMBS market revival

Tue Mar 1, 2011 5:05pm EST

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by Adam Tempkin

NEW YORK, March 1 (IFR) - The competitive pricing of Redwood Trust's recent US$290m RMBS -- the first private-label mortgage bond of the year, and only the second major offering since the onset of the financial crisis -- proves that a mortgage market backed by private capital can be revived without any deleterious effect on borrowers or investors, Redwood's Chief Operating Officer said on Tuesday.

"This residential mortgage securitization demonstrates that the private sector can finance residential mortgage loans without government backing at levels that are attractive to borrowers and investors," CFO Brett Nicholas said in a prepared statement.

"More specifically, the economics of this transaction support private-sector financing of prime mortgages with rates that are within 0.5% of the rates on mortgages financed through Fannie Mae or Freddie Mac. 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."

The California-based REIT launched the offering, Sequoia Mortgage Trust 2011-1, two weeks ago. It consisted of mortgage-loan collateral from originators PHH Mortgage and First Republic. The transaction priced at par, with a 4.125% yield.

The offering was the first major non-agency RMBS since Redwood's last private-label deal in April 2010, the US$222m Sequoia Mortgage Trust 2010-H1, which was only the first private RMBS since the crisis. The 2010 deal had a different originator as well: CitiMortgage.

About 92.5% of the principal amount of the current securitization was rated 'AAA' by Fitch, the only rating agency on the deal.

Shortly after the deal was announced, both Moody's and Standard & Poor's released public reports saying that the Sequoia transaction should have had more protection built into it because so much of the pool was concentrated in the earthquake-prone San Francisco area.

Moody's was originally hired for the deal last year, but was dropped when Redwood Trust disagreed with the agency's more conservative subordination levels.

At the recent Asset Securitization Forum annual conference, Redwood CEO Martin Hughes was outspoken about the need for the government to step back from the mortgage market in order for private capital to flow back in. Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB), and Ginnie Mae currently finance close to 95% of US mortgages.

Hughes reiterated the sentiment today and said that the current Sequoia offering is a very positive step in the right direction.

"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," he said in a press release.

"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.

"We look forward to the potential roll-back at the end of September 2011 of the temporary increase in the conforming loan limits applicable to Fannie Mae and Freddie Mac, which would increase the share of the mortgage market for the private sector and reduce future risk to taxpayers."

(Adam Tempkin is a senior IFR analyst)

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