APR 24, 2013 4:11pm ET

Redwood: PLS Market Needs Better Investor Protections

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Redwood Trust has issued five private-label jumbo mortgage securitizations during the first four months of this year totaling $2.7 billion, nearly doubling its MBS issuance since restarting its securitization business in 2010.

“We plan to securitize $7 billion this year,” Redwood Trust chief executive officer Martin Hughes told a House panel Wednesday.

Headquartered in Mill Valley, Calif., Redwood pools and securitizes prime jumbo loan with loan balances above the $417,000 conforming loan limit. The average loan size is $800,000.

Hughes pointed out that the interest rate Redwood quotes on prime jumbos is competitive with rates on Fannie Mae and Freddie Mac guaranteed jumbo loans. But the GSE loans have a 25 basis point advantage.

“This is strong evidence that private capital will provide borrowers with loans on reasonable terms if investors are presented with well-structured securitizations that also have the proper alignment of interests between the [MBS] sponsor and the triple-A investors,” the Redwood CEO testified.

However, investors have not forgotten the meltdown of the private-label securities market.

“In the last crisis, what investors found is that the rights they thought they had—they didn’t have. And as a result they are very reluctant to step back in the PLS market,” Hughes said.

Those structural deficiencies and conflicts need to be corrected, he said, with greater emphasis on investor protections.

“The private market that Redwood has revived will have difficulty achieving velocity without the combined efforts of market participants, Congress and regulators to correct structural deficiencies and conflicts,” the CEO said.

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