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Fitch on New Redwood Jumbo Deal: Less Credit Enhancement

NOV 13, 2012 6:25pm ET
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The latest jumbo MBS deal from Redwood Trust–via its Sequoia Trust shelf–is getting high marks from Fitch Ratings, which is impressed with the improved credit profile of the collateral backing $301 million worth of loans.

Among other things, Fitch notes there are “very low or zero delinquencies on each of the eight Sequoia Mortgage Trust transactions issued since 2010. Redwood is incentivized to maintain its focus on loan quality as it retains an interest in the securitization through its ownership of subordinate securities.”

In the new bond, a 25 basis point decrease in credit enhancement is due primarily to an improvement in the collateral’s geographic diversification, according to Roelof Slump, a managing director in Fitch’s residential mortgage-backed securities group.

Roelof told National Mortgage News that a little less than 62% of the collateral securing the loans backing the deal are concentrated in three states: California, Texas and Washington.

“That’s a relatively low number compared to prior transactions,” he said, noting that there is less concentration in metropolitan statistical areas within these states as well. Because of the diversification, Fitch reduced the transaction’s credit enhancement to 7.05% for AAA-rated securities, the Fitch managing director said.

There is a greater number of smaller originators in the pools, which has been called a risk factor, but this is offset both by the benefits of the geographic diversification and the fact that the smaller originators involved have produced loans with favorable attributes and 100% due diligence, he said.

Lenders on the deal include First Republic, Fremont, Prime Lending, Flagstar, WL Bradley and Cornerstone Mortgage. Servicers include Cenlar FSB, First Republic Bank and PHH Mortgage.

“All of that [loan] data has been verified,” the Fitch managing director said, noting that that this has made Fitch analysts “comfortable” with how the loans are expected to perform.

When asked whether the growing pace and number of Redwood/Sequoia deals and the fact that at least one other company recently filed a shelf registration with plans to issue jumbo MBS suggests that there are more jumbo deals imminent, he said, “We remain hopeful,” given how well investors have received this type of transaction recently.

— Paul Muolo also contributed to this report

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