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Redwood’s Perfect Score Shows Jumbo Draw for Banks

FEB 11, 2013 10:39am ET
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Redwood Trust Inc. is having a spectacular run. Its shares have returned 83% in the past year and there have been zero defaults among the $4 billion of jumbo loans it packaged and sold as bonds since 2010.

Business for the real estate investment trust is poised to pick up in 2013 as the U.S. housing rebound lifts California and East Coast cities where Redwood finds its mortgages. “The jumbo market is along both coasts, and last we checked they aren’t making any more ocean,” Mike McMahon, managing director at Mill Valley, Calif.-based Redwood, said in a telephone interview. “We expect 2013 to be another good year.”

Jumbos, typically made to the most creditworthy borrowers, and often held on the books of lenders, have been the only new residential loans without government backing to be securitized since the market revived in 2010. Redwood, the most-active issuer, sold $1.1 billion of jumbo-backed bonds last month after about $2 billion in 2012, according to data compiled by Bloomberg.

“The collateral in Redwood deals after the financial crisis is better than the collateral pre-crisis—and it was good before the crisis,” Daniel Furtado, mortgage REIT analyst at Jefferies & Co. in San Francisco, said in an interview. “This is the best-quality paper they’ve ever securitized.”

U.S. home prices rose 8.3% in December from a year earlier, the biggest gain since 2006, as tight supply and brisk demand combined with borrowing costs near record lows, CoreLogic Inc. reported Feb. 5. California cities, which have provided about half of the loans in Redwood’s last 11 securities, were among the best performers in the S&P/Case-Shiller home-price index in November. San Francisco led the 20-city measure with a 2.5% gain from October.

Jumbos, also called nonconforming loans because they exceed the limit for government-run Fannie Mae and Freddie Mac to guarantee, are loans of more than $417,000 in most U.S. housing markets and $625,500 in pricier areas.

Defaults by risky subprime borrowers, with credit scores below 620 out of 850, exposed the lax underwriting and financial markets froze, with defaults spreading to jumbo borrowers with ostensibly better credit, said Brad Blackwell, portfolio manager for residential mortgages at San Francisco-based Wells Fargo & Co., the nation’s largest mortgage lender.

While national values only bottomed last year as measured by the S&P-Case-Shiller index, the jumbo revival has provided liquidity and lifted prices in expensive markets in California, Texas, Florida and the Northeast, according to Thomas Wind, executive vice president at EverBank Financial Corp. Expansion is likely even amid post-crisis scrutiny, he said.

The Jacksonville, Fla.-based bank reported that its retail mortgage business soared 63% to $840 million in the fourth quarter from the previous three months, primarily on the strength of jumbos made to its best customers. EverBank is betting on the real estate recovery as it opens 50 mortgage offices around the U.S., Wind said.

A $398 million deal sold by Redwood in January consisted of mortgages from borrowers with average 760 credit scores and a weighted loan-to-value ratio of about 67%, Moody’s Investors Service said in a Jan. 8 report. More than 80% of those borrowers had at least two years of cash reserves, the rating service said. EverBank originated 37% of the loans in the deal.

Loans backing Redwood’s bond deals that ended the two-year drought in offerings were of “shockingly” good credit quality, Sharif Mahdavian, a New York-based analyst at Standard & Poor’s, said last month at a securitization conference. Quality has “only crept a small bit” lower since and loan-to-value ratios remain relatively low, he said.

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