Redwood Trust has priced its newest publicly placed prime RMBS deal, Sequoia Mortgage Trust 2011-1.
Credit Suisse is the underwriter and lead manager on the deal. JPMorgan Securities and Jefferies & Co. were the co-managers. Citibank is the offering's trustee while Wells Fargo Bank is the master servicer and the securities administrator.
The offered securities include approximately $270 million principal amount of Class A-1 certificates, which are expected to be rated 'AAA' by Fitch Ratings and have an initial interest rate of 4.125% per annum. This is subject to subsequent adjustments and as calculated the way it was set forth in the prospectus offering. The deal is expected to close on March 1.
Moody's Investors Service will not rate the deal, although the rating agency warned that investors should consider the risk posed by the concentration of earthquake-vulnerable properties underlying the transaction.
"Based on preliminary information on the Sequoia Mortgage Trust 2011-1 transaction, we believe that the pool is more exposed to earthquake risk than most RMBS pools given that 56% of the loans by principal balance are in California and much of that exposure is in the San Francisco Metropolitan Statistical Area (MSA)," said Linda Stesney, a Moody's managing director. "If a major earthquake were to strike the San Francisco MSA, the decline in the values of damaged properties, and the likelihood that borrowers could abandon properties whose value has plummeted, will likely result in either losses to senior certificate holders or the deterioration of the credit quality of the notes to junk status."
Because an earthquake can happen at any time, Moody's ran various scenarios to determine the potential loss to the deal's 'Aaa'-rated portion resulting from an earthquake of greater than 7 magnitude at the end of any given year in the San Francisco area.
This includes a scenario where the earthquake occurs at the end of the fifth year, the pool prepays at the rate of 10% per year, 80% of the borrowers in the San Francisco MSA default, and the recovery on the damaged houses is 30% of the house price just prior to the earthquake.
"For example, if we determined 'Aaa' credit enhancement to be 6.5% in the absence of an earthquake, we calculate that a pool that is highly concentrated in the San Francisco MSA could require an additional 50% enhancement to cover the incremental risk of damage from an earthquake to mortgage properties in earthquake-prone areas," Stesney said.
Meanwhile, Fitch's rating approach for RMBS pools with significant concentrations in a small number of MSAs, applies a penalty to the pool to protect against fluctuations such as natural disasters.
"On the Sequoia 2011-1 pool, a geographic risk penalty of 1.25 times (x), or a 25% increase, was applied to Fitch’s cumulative default assumption — primarily due to concentrations of San Francisco, Oakland, and Fremont in the transaction," the rating agency analysts said. "This additional credit enhancement is sufficient to account for the risks posed by economic variance or natural disaster risk."
Fitch also considered the strong collateral performance through previous periods of regional stress, reflecting the strong equity and asset reserves of their borrowers. "
These securitized loans in San Francisco, which have experienced significant market-value-declines in recent years have at the same time exhibited stellar performance," rating agency analysts reported.
Meanwhile, investors, who have seen practically no activity on the new issues non-agency RMBS front, are likely to find these high-quality Jumbo loans in the pool extremely attractive. Fitch said in its presale report on the deal that the collateral pool comprises loans to borrowers with exceptionally strong credit profiles. Borrower FICO scores range from 701 to 815 and the weighted average (WA) FICO score is 775.
The loans benefit from substantial equity with a wieghted average combined loan-to-value ratio of 62.8%. The borrowers' weighted average monthly income is approximately $46,593. Their weighted average assets are over $2 million. All income used to qualify the borrowers was fully documented.
"Our goal is to highlight the risk but taking the MSA risk out of the picture and just looking at the attributes of the loans, they are very high quality in terms of FICO score — they are unusually strong in that sense," Stesney added.