Redwood Trust's second residential mortgage backed deal this year includes 19 mortgages, or 3.7% of the pool, that fall outside of the qualified mortgage guidelines.

Morgan Stanley and Wells Fargo Securities are the lead underwriters on Sequoia Mortgage Trust 2015-2.

Although the issuer was the first post-crisis RMBS issuers to include nonqualified residential mortgages, it's only ever done so in negligible amounts. In its previous transaction, for example, issued in January, Redwood included only four non-QM mortgages, or 0.8% of the pool,

Kroll Bond Ratings, which is rating the latest transaction stated in the presale that the number of non-QM loans in the pool is considerably higher than the amount of non-QM loans seen in any previous transaction it rated, which has been between 0.6% and 1.5%, but the increase only “resulted in a minimal adjustment to the loss severity and expected loss based on the high quality of these mortgage loans.” Mortgages that fall outside the QM guidelines are at greater risk of litigation-related losses.

Similar to  non-QM loans Redwood included in its previous jumbo prime RMBS deals, the 19 loans in 2015-2 were originated to borrowers with strong credit strength as evidenced by the strong weighted average FICO of of 761, substantial equity in properties (WA combined loan-to-value of 62.7%) and a significant amount of reserves ($208,183 WA liquid reserves). 

SEMT 2015-2 also introduces a “120-day stop advance feature”. The new feature means the servicer or servicing administrator is no longer required, or permitted, to provide advances of interest and principal on loans that are 120 days or more delinquent. “With servicers no longer advancing payments on loans that are 120 days or more delinquent, loss severities and the resultant realized losses are likely to be moderated to an extent,” stated analysts in the Kroll presale report. 

However, the structural feature “may also result in interruptions and reductions of current interest payments, particularly to the most subordinate class or classes outstanding. Regular cash flow would resume once the loan default is resolved and the most subordinate bond or bonds would either be reinstated or written down depending on the loan performance and actual losses.”

Sequoia 2015-2 is backed by a pool of 518 loans that are mostly 30-year, fixed-rate residential mortgages with a balance of $356.4 million. The loans have a 67.5% WA LTV ratio and 68.0% WA CLTV.  Borrower credit quality is likewise strong, with a WA original credit score of 770, higher than the 769 score of the issuer’s previous transaction, 2015-1.  

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