Redwood Trust is jumping into the risk sharing game.

The real estate investment trust disclosed in its third quarter earnings report Thursday that it plans to sell Fannie Mae $1.1 billion worth of loans, on which the REIT will absorb the first 1% of credit losses.

Similar to Fannie Mae's Connecticut Avenue Securities transactions, credit performance is linked to a reference portfolio of conforming mortgages.  But the Redwood transaction is entirely between Fannie and itself - there are not any tranches that will be sold to bond investors.

The sale will take place during the fourth quarter of 2014. 

“This risk-sharing arrangement provides a strong, direct alignment of interests between Redwood and Fannie Mae for the acquisition and sale of high-quality mortgage loans,” stated Redwood in the report.

JP Morgan initiated a $47 million credit risk transfer RMBS with Fannie Mae in October on a $989 million reference prime-quality mortgage portfolio.

The deal tracks the performance of a $989 million reference pool of agency mortgages originated by the bank. The loans in the pool are being delivered to Fannie Mae which will then bundle them into a Fannie-guaranteed MBS. Under the transaction, dubbed, J.P. Morgan Madison Avenue Securities Trust, Series 2014-1, JP Morgan will absorb the cost of losses up to 4.75%. 

Fitch gave a $19.78 million M-1 tranche a preliminary rating of ‘BBB-.’ The coupon on the tranche is 225 basis points over one month Libor. There is also an unrated M-2 tranche for $27.2 million with a coupon of 425 basis points over.

The transactions increase the role of private capital in the mortgage market — one of the goals set forth in the 2014 FHFA Scorecard. 

Freddie Mac has used mortgage insurance structures ACIS 2014-1 and 2014-2 this year to satisfy the FHFA requirement that each GSE use at least one additional risk transfer transaction in addition to the STACR/CA structures, according to a Barclays report.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.