It appears that Redwood Trust—until recently the only securitizer of jumbo mortgages in the nation—has company in the space: Credit Suisse First Boston. But don’t pop the champagne quite yet. It’s not what you think.
In March Credit Suisse securitized $418 million of jumbos, and then came to market in late June with a $730 million offering. But when you look at how CS gathered its product for securitization you might scratch your head and say “oh.” Most of the jumbos in those deals came from MetLife Bank, which was in the process of liquidating.
In other words, if MetLife wasn’t in such a hurry to exit the banking space, it would have never sold its jumbos to CS in the first place—or so it’s been suggested to me.
The problem with the jumbo MBS market, as I’ve noted before, is the sterling credit quality of current production and the staunch unwillingness of originators to sell mortgages into securitization trusts. When a bank has a cost of funds of 75 basis points (or less) and they can put short-term paper (many jumbos are five-year IOs) on their books yielding 4.5% you can do the math. Only a crazy person would sell into the secondary market.
Amazingly, the publicly traded Redwood Trust has come to market with six jumbo deals since 2010—three of which came to market in the first half of this year. But Redwood has carefully and slowly built up its business by cultivating a network of jumbo sellers that are willing to unload a few loans at a time.
And here’s the kicker about the Redwood deals: The delinquency rate on its six bonds is zero. That’s not a misprint. Zero. A few of the mortgages have fallen into the 30-day-late category and then were brought current because the rich folks paying those loans were out of town or too busy and forgot to make their payment on time. (Prepayments on early bonds have been high.)
There has been talk that some megabank, sometime this year, might come to market with a deal but so far that rumor hasn’t panned out. Meanwhile, buyers of jumbos in the secondary market haven’t exactly been paying up for the loans. One Massachusetts-based sales executive complained to me that his firm—which sells servicing released—isn’t “making much” on his non-GSE sales. “It could be better.” It appears the real money in gain-on-sale is on Fannie Mae and Freddie Mac loans—no surprise there.
An originator selling Fannie Mae 5% coupons can receive as much as 108 (100 is par) for their assets. Coupons at 6% are going for as much as 110, I was told. These prices may sound crazy but consider this: certain coupons have low prepayment risks because the underlying loans might be underwater and cannot be refinanced