Rating agency presale reports came out last week on the latest deal from Redwood Trust, the only consistent issuer/aggregator of nonagency/Jumbo securitizations. These show it is continuing to work toward perfecting its mix of inherent Jumbo risks and mitigating factors.
As noted previously by ASR sister publication National Mortgage News' Web site, Fitch Ratings in its presale report said that California loans are still a big part of the latest deal (49%). But, overall, the geographic concentration risk has improved a bit compared to previous deals.
Also, Moody’s Investors Service said that in the deal the San Francisco Bay Area concentration is lower than previous transactions. There are 18.2% of the loans in that area as compared to concentrations ranging from 26.4% to 32.7% in the past.
Kroll Bond Ratings noted that while the geographic concentration risk is still high, it considers it mitigated by the fact that a number of the borrowers in the areas of concentration are affluent to the extent where they have “substantial financial flexibility.” Also the main originators in the areas of concentration are ones within the transaction that do have somewhat of a performance history, and it is strong for the region.
There are 18 originators in the deal and Moody’s indicated many have limited history in securitizing prime Jumbo loans. This is understandable, given that the market for Jumbo loans—securitized ones in particular — has been relatively limited since the downturn.
A new trustee is involved in the deal, Christiana Trust, and that trustee has relatively little RMBS experience, Moody’s noted. However, this is mitigated by the fact that Wells Fargo Bank—an experienced RMBS servicer—is performing the custodian, paying agent and cash management functions of the trustee, the ratings agency said. This leaves the new trustee with responsibility for pursuing some breaches of representations and warranties. But even in this capacity it is slated to use an outside firm to perform the task, according to Moody’s.
There are multiple loans made to single borrowers in some cases. Situations where a loan is made to a single borrower who has taken out four or more loans (with the other loans existing outside the collateral pool) represent 4.8% of the deal, according to Moody’s. This is not a high percentage. Also these loans have mitigating factors in the form of cash reserves, low debt-to-income ratios and/or low combined loan-to-value ratios. Moody’s said there is an average of 100 months of reserves for these borrowers as a group and only three borrowers have less than 24 months of reserves. The three borrowers who have less than 24 months of reserves have DTI ratios of 24%, 24% and 35%. The one with the higher DTI ratio has a CLTV of 61%.
Moody’s indicated the deal’s credit, while strong, is not as strong as previous transactions in terms of increased concentration in the 75%-80% LTV and CLTV range. On the other hand, its level of geographic concentration risk — as previously mentioned—has lessened. It also has an absence of adjustable-rate mortgages that is favorable, the ratings agency said.
Large Jumbo loans, often known as “superjumbo” mortgages, can be a concentration concern, Kroll noted in its report. However, these tend to be underwritten conservatively and there are fewer of these than in other recent Sequoia deals. Also, “the largest loans are not as large relative to the pool balance.” According to Kroll, the largest loan is $2.3 million in size and represents 79 basis points of the mortgage pool.