Redwood Trust's first mortgage bond offering of 2019 features higher concentration of loans originated by the top three sellers, according to Kroll Bond Rating Agency.
Like most prior deals from the sponsor, the $349.57 million Sequoia Mortgage Trust 2019-1 is backed by 537 loans from a large number of sellers; in this case, 69. Unlike most prior deals, however, the top three sellers account for 58.5% of the collateral. In its presale report, Kroll notes that loans from the top two originators, loan Depot and TIAA FSB (FKA Everbank), were purchased in bulk based on the respective originator’s guidelines.
Kroll is not particularly concerned about the concentration, however. In its presale report, the rating agency notes that Redwood successfully manages its seller relationships, monitors collateral performance and acquires high-quality loans. "This is demonstrated in the performance of their Sequoia shelf, which has minimal delinquencies on the mortgages backing the previous SEMT transactions issued since 2010," it states.
Furthermore, Redwood’s practice of owning a portion of the subordinate certificates helps provide an incentive for the conduit to maintain a focus on loan quality - though there are no guarantees or requirements that Redwood will maintain its ownership for any specific time period and the amount of ownership may be limited.
As with prior deals, the collateral for SEMT 2019-1 collateral pool contains loans designated as qualified mortgages, though for certain loans, the designation is QM even though the borrower’s debt-to-income ratio may be above 43%, due to a temporary exemption afforded to GSE-eligible loans under the ability-to-repay rules. However, the proportion of jumbo conforming loans in this transaction is significantly less than that of Redwood's prior deal, completed in October 2018, at 30.2%, down from 67.8%
Among other risks, 23 loans (8% of the pool) have balances of $1 million or more, ranging from approximately 0.4% to 0.6% of the pool each.
The loans will be serviced by SMS (59.3%), TIAA, FSB (18.4%), Quicken Loans (16.5%), HomeStreet Bank (2.4%), First Republic (1.8%) and Associated Bank (1.6%), all of which are experienced mortgage loan servicers. Redwood Residential Acquisition Corp. will retain the servicing rights on the SMS subserviced loans.
Kroll expects to assign an AAA to the super senior tranches of securities to be issued in the deal, which benefit from 15% credit enhancement, as well as the senior support tranche, which benefits from just 5% credit enhancement. Those levels are unchanged from Redwood's prior deal from the Sequoia shelf.
However, credit enhancement on some of the subordinate tranches of notes to be issued has increased. The AA rated tranche has 3.5% CE, up from 3.45% in the same tranche of the prior deal. Credit enhancement for the A tranche is unchanged at 2.25%; however, the BBB tranche benefits from 1.15% CE, up from 1.05%, and the BB tranche benefits from 0.55% CE, up from 0.5%.
