Sequoia Mortgage Trust is coming to market to raise another $324.6 million in residential mortgage-backed securities (RMBS) on prime, jumbo mortgages.
Much about the transaction, known as SEMT 2023-2, remains the same from previous deals. First-lien loans financing primary residences make up the vast majority of the pool, and a plurality of borrowers in the pool by loan balance, 41.6%, reside in California and Texas. By metro area west coast cities like Seattle and San Francisco, and Denver account for the largest share; yet the top three also account for just 27.2% of the pool balance, according to a pre-sale report from Kroll Bond Rating Agency.
SEMT 2023-2 shifted some of its underwriting from traditional full documentation to agency underwriting, with the latter accounting for 14.1% of the pool balance, by far the largest proportion compared with the next-largest deal, the SEMT 2022-1, at 1.9%, according to KBRA.
The debt-to-income ratio in the pool is also comparatively high, at 37.2%, and that had been creeping upward since the SEMT 2021-8, KBRA said.
While the credit quality of the underlying loans is a plus, the combined characteristics of a small pool of large-balance loans will weigh on it as a potential credit negative. The SEMT 2023-2 has one of the smallest loan counts from this program in more than a year, the rating agency said.
"When a pool contains large loan balances with a relatively low loan count," KBRA analysts wrote, "certain loans can represent an unusually large percentage of the pool balance, and thus, a potentially outsized future loss amount in small pool."
Fitch Ratings notes that the deal has a subordination floor of 1.00% and will maintain that. This should help mitigate tail risk, which grows as the pool seasons over time and leaves fewer loans outstanding.
Overall, however, SEMT 2023-2's senior-subordinate, shifting-interest structure and all other material characteristics are the same, according to Fitch.
The rating agency expects to assign 'AAA' from class A-9 through A-IO22; 'AA-' on the B-1 notes; 'A-' on the B-2s; and 'BBB-' and 'BB-' on the B-3 and B-4 notes. For its part KBRA also expects to assign ratings of 'AAA' to the A-9 through the A-IO22 notes; 'AA' on the B-1 notes; 'A' on the B-2 notes; and 'BBB' and 'B+' on the B3 and B4 notes.
