Redwood Trust is considering several structural changes to its private-label securitizations in an effort to make them more attractive to investors.
Speaking at a conference in Washington D.C. on Monday, Fred Matera, Redwood's chief investment officer, said one idea is to transfer single-family loans that become 120-days past due to a special servicer that will be responsible for loss mitigation and loan modifications.
Once the loan is transferred, "the senior investor does not have to worry about making advances of principal and interest payments," he said at a Bipartisan Policy Center housing summit in Washington. He expects this change can be implemented once the details are worked out with the bond rating agencies.
The mortgage real estate investment trust has been a leader in issuing private-label jumbo securitizations and efforts to reform the PLS market.
The Mill Valley, Calif., based REIT would also like to limit the ability of borrowers to take out second liens once a first lien is securitized. But Laurie Goodman, the director of the Urban Institute's Housing Finance Policy Center, reminded Matera that it would require legislation to do that. The Garn-St Germain Act of 1982 protects the rights of borrowers to take out a second lien.
Transferring loans that are 120-days past due will help to resolve conflicts that arise when a servicer owns the second lien, she said, which is not uncommon.
"If the servicer owns the second lien and services the first liens, the big problem is during the loss mitigation," Goodman said.
Transferring the servicing to a special servicer is easy to implement and "its gets rid of a lot of conflict of interest problems," Goodman said during the panel discussion on the PLS market. Before joining the Urban Institute, Goodman was a managing director at Amherst Securities Group.
Matera also noted that Redwood would like to establish a third-party manager to be a fiduciary that looks out for investor interests.
This manager would monitor servicer performance, review expenses that are charged to the trust and replace the main servicer if it is not living up to standards. Redwood included this suggestion in its "Guide to Reviving the Private Label Securitization Market" that was released in August.
Mantera stressed, however, that it will take longer to set up such a monitor. "It's the trickiest suggestion and potentially the costliest as well," he said.
Goodman called the collateral manager an "excellent idea" that would provide enforcement of representations and warranties on loans. "It also gives investors some transparency on servicer behavior with respect to loan modifications and other loss mitigation activities."
More structural reforms are needed to ensure a deeper PLS market, the Redwood executive said. Matera also noted that lowering Fannie Mae and Freddie Mac loan limits would lead a larger PLS market than raising guarantee fees.
But the Obama administration is not in favor of reducing the limits on government sponsored enterprise loans at this time, according to a special housing finance advisor to Treasury Secretary Jack Lew.
"The Federal Housing Finance Agency has said it will not consider reducing GSE conforming loan limits unless and until it sees evidence that private capital is ready to step in at sufficient scale so as not to adversely impact the current health of the market," Michael Stegman said at the conference..
"We agree that absent structural reforms, materially lowering GSE loan limits would at best, raise mortgage rates, and at worst, reduce access to credit," the Treasury advisor said.
