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Redwood Trust to Sell First Mortgage Bonds This Year

MAR 19, 2014 7:23pm ET
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Redwood Trust Inc., the biggest issuer of U.S. home-loan bonds without government backing last year, is ending its four-month absence from a market that’s all but evaporated as banks compete with debt investors for the extra yield offered by private-label mortgages.

Redwood, which specializes in jumbo mortgages, is planning a sale tied to 429 loans with outstanding balances of $347.3 million, Fitch Ratings said Tuesday in a presale report. The Mill Valley, California-based firm is including “fully-documented loans to borrowers with strong credit profiles, low leverage and substantial liquid reserves,” the credit grader said.

The real-estate investment trust is returning to the bond market after saying last month it has been selling most of its mortgages without packaging them into securities. Banks have been buying or retaining home loans because it’s lucrative to do so with the Federal Reserve holding funding costs near zero, and because demand for other lending remains limited.

“We will always prefer securitization to selling whole loans for a number of reasons,” including “to ensure the long-term liquidity of our program,” Redwood PresidentBrett Nicholas said on a Feb. 24 conference call for analysts and investors. Demand for top-rated securities has shown “clear signs of improvement” this year, he said.

Bundling loans into securities instead of selling them offers Redwood returns after issuance because it retains the riskiest slices. Redwood issued securities backed by about $5.6 billion of loans in 12 deals last year, according to data compiled by Bloomberg. Its last deal was in November.

Michael McMahon, a spokesman for Redwood, declined to comment.

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

“The bank bid for loans is too strong relative to private label execution,” the New York-based analysts led by John Sim wrote in a March 7 report.

Issuance has also been hurt by bond investors’ demands for higher yields and a slump in new loan volume sparked by higher mortgage rates. Prices on recently-issued top-rated non-agency securities fell to as low as 4 cents on the dollar below similar government-backed bonds toward the end of last year, after fetching higher prices early in 2013, the JPMorgan analysts said in their 2014 outlook report in November.

While total issuance of non-agency 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 has dropped to less than $1 billion so far this year, the data show. Sales peaked at $1.2 trillion in each of 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 percent down payments.

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