Redwood Trust’s fifth securitization of mortgages is being issued with slightly looser credit parameters, according to Kroll Bond Rating Agency.

The collateral for the $416.9 million Sequoia Mortgage Trust 2018-CH3 (SEMT 2018-CH3) contains both loans designated as qualified mortgage and loans that do not meet the criteria. However, certain loans are designated non-QM even though the borrower’s debt-to-income ratio may be above 43%, due to a temporary exemption afforded to loans eligible to be purchased by Fannie Mae and Freddie Mac under the ability-to-repay rules.

In addition, the pool contains loans secured by investor properties exempt from ATR rules, according to Kroll.

The majority of the loans in the subject pool were originated using full income documentation or were originated in accordance with the underwriting guidelines of Fannie Mae and Freddie Mac. However, a percentage of loans were underwritten using nontraditional documentation, such as asset depletion, or utilizing income from nonoccupant co-borrowers when performing DTI calculations. “Nontraditional documentation programs may result in higher default risk than loans with more traditional income qualification. None of the loans in the pool were originated using alternative income documentation (e.g. bank statements),” Kroll said in its presale report.


Kroll expects to assign an AAA rating to both the super senior classes of notes to be issued, which benefit from 15% credit support, as well as the so-called senior support tranche, which benefits from just 10% credit support.

The overall credit quality of the collateral is weaker than that of Redwood's previous transaction, SEMT 2018-6, which came from its "super prime" platform. The pool of loans backing SEMT-CH3 has a weighted average cumulative loan to value ratio of 77.3%, up from 70.4%. The percentage of borrowers with CLTV of over 80% is significantly higher, at 30%, compared with 3%.

Likewise, the weighted average FICO is 746, 10 basis points lower than that of Redwood’s previous deal. Notably, the percentage of borrowers with FICOs below 680 is significantly higher, 623%; there were no borrowers in this FICO band in Redwood’s previous transaction.

The weighted average debt-to-income ratio is higher, at 37.7% versus 35%, and the percentage of borrowers with DTIs greater than 43% is 24.1%, up from 17.9% in Redwood’s previous transaction.

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