The latest Jumbo securitization from Redwood Trust, the only issuer that has been in the market recently has a lot of positives as usual. But among its few negatives is a slightly reduced and somewhat idiosyncratic geographic concentration risk that may be offset by the strength of the regional originator the produces it.
California concentrations in Jumbo deals are historically not unusual, said Fitch Ratings managing director Roelof Slump, who added, “In general, California was a meaningful percentage of most prime RMBS transactions, and other areas of the country where high-cost homes are common were evidenced as well.”
When asked how the concentration in the Sequoia Mortgage Trust 2011-2 deal compares to the historical percentages concentrated in the San Francisco MSA, he noted that “in 2000-2007, prime securitizations had approximately 11% within this MSA so this (31% concentration in San Francisco) is a meaningful difference.” He also stated that the Los Angeles MSA concentration in the pool of 11% is in line with historical averages for prime nonconforming pools.
“Obviously, there are a lot of attributes within this deal that are very positive, but Fitch felt that it was appropriate to assign the higher default penalty (by 1.29 times) across this entire deal due to the geographic concentration,” he said.
The extent to which the limited number of Sequoia deals done recently in the new-issue jumbo market can be considered comparable to the far different and larger securitized private-label market between 2000 and 2007 is limited, the Fitch analyst said.
The geographic concentration in the case of the Sequoia deal is generally because a meaningful originator (for the deal, originating 53% of the loans for it) has a natural geographic footprint there.
The originator, First Republic Bank, “knows the market really well,” said the Fitch analyst, noting that there are a number of “meaningful strengths from the production coming from this originator” that include “relatively low LTVs, very strong credit profiles and very good reserves.
“We would expect performance to be very good for this pool,” he said. “Historically, [First Republic Bank's] performance has been exceptional. We expect the loans to be high performers in the future.”
When asked whether the concentration risk is a function of conditions in the “new” securitized jumbo market in general and if the market could diversify going forward if conditions were to change, the Fitch analyst said, “Theoretically, if loan limits were to drop you might see more geographic diversity.”
But he stressed again that, in the Sequoia pool, the concentration is linked more to the “originator contribution” than the overall market.
In other Jumbo-related securitization news last week, Two Harbors Investment Corp. (which is among the players that have shown interest becoming Jumbo issuers) held a panel discussion on the future of the mortgage market at the New York Stock Exchange last Thursday.
Referring to recent discussions by the Securities and Exchange Commission about mortgage REITs' exemption from the 1940 Act, Thomas Siering, CEO of Two Harbors, noted, “While we take these matters very seriously, we are confident that the industry and the regulators will satisfy this issue to their mutual satisfaction.”
“We are still in the wake of the bubble,” said Alex Pollock, resident fellow, American Enterprise Institute for public policy research and a panelist at the Two Harbors event. “Where we are now is, who will realize the losses?”