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Redwood Returns to Mortgage Bond Market with $342M Deal

MAR 25, 2014 5:58pm ET
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Redwood Trust Inc., the biggest issuer of U.S. home-loan securities without government backing last year, ended a four-month absence from the market with a $342 million transaction.

Redwood, which specializes in jumbo mortgages, sold $179.7 million of top-rated securities paying 4% coupons at 101.3 cents on the dollar, according to a person with knowledge of the matter, who asked not to be identified citing a lack of authorization to speak publicly. That’s about 2.7 cents on the dollar less than comparable benchmark Fannie Mae-guaranteed bonds, according to data compiled by Bloomberg.

The real estate investment trust returned to the market after saying last month it has been selling most of its mortgages without packaging them into securities amid the relatively higher prices being paid by banks seeking loans for their balance sheets. Bundling mortgages into bonds offers Mill Valley, Calif.-based Redwood income after issuance because it retains the riskiest slices of the debt.

Redwood created securities backed by about $5.6 billion of loans in 12 deals last year, according to data compiled by Bloomberg. Today’s sale, which also included a top-rated $136.5 million portion with a 3% coupon, was managed by Bank of America Corp.’s Merrill Lynch unit, the person said.

Demand from banks for jumbo loans prompted JPMorgan Chase & Co. analysts this month to lower their forecast for 2014 issuance of nonagency, or private label, securities to $5 billion to $10 billion, from about $20 billion.

Issuance has also been hurt by bond investors’ demands for higher relative yields and a slump in new loan volume sparked by higher mortgage rates. Prices on recently issued top-rated nonagency securities fell to as low as 4 cents on the dollar below similar agency bonds toward the end of last year, after fetching higher prices early in 2013, according to JPMorgan.

While total issuance of nonagency securities tied to new loans jumped to $13.4 billion last year from $3.5 billion in 2012, the sales collapsed after September, Bloomberg data show. Less than $1 billion of the deals were completed from October through December, and issuance totals about $1.3 billion so far this year. Sales peaked at $1.2 trillion in both 2005 and 2006.

Jumbo mortgages are those larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in high-cost areas. Limits range from $417,000 to $625,500 for Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20% downpayments.

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