Kroll Bond Rating Agency (KBRA), Fitch Ratings and Moody’s Investors Service assigned preliminary ratings of ‘AAA’/’AAA’/’Aaa’ respectively to $371.62 million of class A notes to be issued under Redwood Trust’s tenth RMBS deal of this year.
But only Fitch and Kroll will rate the subordinate notes. The structure offers $10.2 million of ‘AA’/'AA' notes; $6.8 million of ‘A’/‘A’ notes; $4.6 million of ‘BBB’/‘BBB’ notes; and $3.2 million of ‘BB’/BB’.
The deal, SEMT 2013-10 is backed by a pool of prime jumbo mortgages. The 529 first-lien mortgage loans are nearly all 30-year fixed-rate mortgages, with two being 20-year fixed-rate mortgages. There are no interest-only loans in the pool.
The weighted average LTV of the pool is 67% and the weighted average credit score of the mortgage pool is 775, which is well within the prime mortgage range.
All three ratings agencies noted that the SEMT 2013-10 transaction has significantly higher loan seller diversity than prior KBRA-rated SEMT transactions but many of the lenders have limited non-agency performance history.
“While seller diversity helps reduce geographic concentration, it also increases exposure to the underwriting standards and processes of sellers with limited jumbo mortgage loan performance history,” explained KBRA in its presale report.
Moody’s noted that some of these lenders may lack the financial resources to repurchase defective loans under the representation and warranty agreement.
Redwood mitigated this risk by conducting a third party due diligence review of almost 100% of the loan files. Kroll noted that the generally positive results of those reviews, “reduces the risk of underwriting weakness and breaches of R&Ws"
Also in the event that a loan seller fails to cure, repurchase or substitute a loan that is in breach of a R&W due to bankruptcy, insolvency or no longer being in existence, Redwood Residential Acquisition Corporation has an obligation to step in.
Moody’s noted in its presale report that another mitigant is that no single originator is responsible for more that 10% of the pool balance.
Merrill Lynch, Pierce, Fenner & Smith is listed as lead manager on the deal.