If the new RMBS deals issued in the past week give an indication of what the non-agency market space will look like, then it is clear that only the best will do.
However, FTN Financial analysts said in their latest mortgage strategy report that if these latest deals represent what is ahead, the size of the non-agency RMBS market will remain small.
Additionally, for non-agency RMBS to truly take off in a meaningful way will require legislative and regulatory support for either covered bonds or private label securities.
According to FTN analysts, "the market has clearly demonstrated that it is ready for such action." The number of deals that have emerged recently demonstrate this fact.
Redwood Trust completed its second transaction this year called Sequoia Mortgage Trust 2012-2. It is the mortgage REIT's fifth deal securitizing Jumbo mortgage loans since 2008. The transaction consists of 366 loans of roughly $328 million in 30-year, fixed-rate collateral as of the cutoff date.
Compared to past post-financial crisis deals, the latest 2012 vintage deal is similar to the issuer's Sequoia Mortgage Trust 2011-2 deal. All of the deals executed since 2010 have similar LTV and the percentage of adverse geography similar to the higher-quality 2003/2004 vintages, according to analysts. The one-month prepayment performance of the 2011 deals is also similar to that of 2003/2004.
But the new post-crisis underwriting standards mean that the latest Sequoia mortgage transactions also have almost zero delinquencies as well as no modifications and realized losses so far. The deals also benefit from much faster lifetime voluntary constant prepayment rate and significantly higher FICO scores. The latest deals also benefit from much higher average loan balance and virtually no low-document loans, according to the FTN report.
"There just are not that many 1-4 family loans with greater than 750 FICO [score and] greater than $750,000 average loan balance out there to securitize," analysts said. "There are potentially a few more deals to do, but this is not the face of the future of mortgage finance in the U.S."
To be sure, the market has already seen that trickle of RMBS deals underwritten to these new, more stringent standards. Redwood has been the only issuer to come to public market, however.
Last week, Credit Suisse sponsored a $730 million transaction of seasoned Jumbo mortgages originated by MetLife. The REIT Chimera is the buyer of the first-loss junior tranche, according to the report.
DBRS and Standard & Poor's rated $683 million of bonds in the deal triple-A. According to Bloomberg, the triple-A tranche priced with a coupon rate of 3.38%.
A $1 billion transaction fromPrudential Insurance Co. of America has also come to market.