Redwood Trust is confident that its offering of residential mortgage backed securities (RMBS), Sequoia Mortgage Trust 2013-12, will get priced despite the more challenging environment, executives said during an earnings conference call.
The real estate investment trust is the most regular issue of private-label RMBS, It began marketing Sequoia Mortgage Trust 2013-12 this week, shortly after Shellpoint withdrew its sophomore deal, Shellpoint Asset Funding Trust (“SAFT”) 2013-2, on Oct. 22.
Shellpoint instead opted to sell the underlying whole loans, saying its decision was based on the “substantial pricing disconnect” between the whole loan and new issue RMBS secondary markets.
Nevertheless, Redwood executives said today, they are confident that the firm's latest RMBS will get priced because it is backed by “higher coupon mortgages [that] will be priced more favorably by investors."
Redwood said that current mortgage interest rates, because they are much higher, have created a new, much longer, expectation for the duration of securities backed by lower coupon mortgages. “For instance an initial expectation of a five to seven-year investment period may now be an eight to 10 year investment period,” executives said. “Investors are demanding more yield (lower prices) to compensate for additional duration risk.”
Citigroup, which was also in the market at the end of October with a $210 million RMBS deal called Series 2013-J1 reportedly sold its entire deal. The structure offered investors $189.5 million super senior, AAA’ notes and $6.8 million AAA’ rated, class A-2 tranche. Further down the credit curve, the structure offered $2.2 million of AA’-rated class B-1 notes; $2.1 million of A’-rated class B-2 notes; $735,000 of BBB’-rated class B-3 notes; and $5.2 million of BB’-rated class B-4 notes.
The deal, said one person familiar with the transaction, was not reduced in size, despite rumors to the contrary, and “there was abundant demand for all classes, including the AAAs.”
Redwood explained during its call that investors in triple-A rated RMBS will view securities backed by “more recently originated, higher coupon mortgages more favorably from a pricing standpoint.”
“This should help revive RMBS issuance,” said the issuer.
In the near-term, Redwood expects its loan sale distribution to be a combination of direct whole loan sales and securitizations. But the issuer said that “private securitization is our preferred source of loan distribution as it allows us to create attractive, home-cooked’ credit and interest-only investments for our portfolio.” As opposed to whole loan sales, which generate a one-time fee, only.
Redwood has complete 20 securitization transactions since 2010 that have created over $500 million of investments for its portfolio. In the third quarter of 2013, the mortgage REIT completed three Sequoia securitizations totaling $1.2 billion, down from four securitizations totaling $1.8 billion in the second quarter. Redwood also completed $600 million of whole loan sales in the third quarter, up from $286 million in the second quarter.
The mortgage REIT said that it is also looking at possibly acquiring and distributing, maybe through securitization, “safe, well-underwritten mortgages made to good borrowers that do not meet the technical definition of a “Qualified Mortgage” under the new Consumer Financial Protection Bureau rules that go into effect in early January 2014.