New disclosure rules haven’t completely shut down the market for private-label mortgage bonds.
Redwood Trust is marketing a $345 million deal with substantial exposure to loans that are subject to the TILA-RESPA Integrated Disclosure Rule, also known as TRID, which is meant to help consumers understand the total costs of a home loan. Compliance has proven difficult, and some kinds of violations create assignee liability, meaning mortgage bond holders could be subject to losses on loans should borrowers successfully sue.
As a result, many investors have been reluctant to purchase loans without further guidance from the Consumer Financial Protection Bureau.
This deal, dubbed Sequoia Mortgage Trust 2016-1, is Redwood’s first since TRID took effect in October. Nearly three-quarter of the collateral (74.8% by balance) is TRID-eligible, according to Kroll Bond Rating Agency, which is rating the deal.
By comparison, a deal completed by Two Harbors Investment Corp. in March had much lower exposure: just 9% of the loans used as collateral were subject to TRID.
Still, KBRA’s is making a “minimal” adjustment to the loss severity and expected loss for Redwood’s deal. In its presale report, it cited the high quality of the loans, the limited amount of damages available to successful claimants, and its own assumptions of relatively low success rates for claims.
Borrowers have significant equity in the loans backing SEMT 2016-1; the original weighted average loan-to-value ratio is 68.25%, provide a substantial margin of safety against potential home price declines. Borrower credit quality is likewise strong: the weighted average credit score is 766 and a significant portion of the borrowers exhibit a substantial amount of liquid reserves.
KBRA also believes the potential assignee liability stemming from TRID violations is both limited and quantifiable. “The number of affirmative claims will be limited due to the statute of limitations, as well as KBRA’s view of the low likelihood a claim will even be brought to court due to the lack of financial incentive for the borrower to pursue a claim,” the presale report states.
Kroll has assigned preliminary ‘AAA’ ratings to both the super senior tranches of the deal, which benefit from 15% credit enhancement, as well as the senior tranche, which benefits from 5% credit enhancement.
At issuance, Redwood will retain the two most subordinate tranches (1.1% by balance), though, according to KBRA, this is done as part of its business model and not for the purposes of complying with rules requiring securitizers to hold an economic interest in their own deals.