Reacting Defensively, Redwood to Focus on Jumbos in Volatile Market

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Redwood Trust is "repositioning" its mortgage business by focusing mainly on jumbo loans, according to its top executives.

The Mill Valley, Calif.-based real estate investment trust stopped buying Fannie Mae and Freddie Mac loans in the fourth quarter and discontinued its acquisitions of commercial real estate loans in February 2016.

"Our core jumbo mortgage banking franchise is well positioned and remains consistently profitable despite evolving market conditions," Brett Nicholas, president of Redwood Trust, told equity analysts during a conference call Friday.

The REIT stopped purchasing conforming loans from Fannie and Freddie due to declining sales margins and the "unrelenting competitive pricing pressure" on such loans, Nicholas said.

He added, however, that Redwood can still purchase mortgage servicing rights since Redwood remains an approved Fannie and Freddie seller/servicer.

Nicholas said that it was no longer profitable for Redwood to acquire CRE loans for securitization.

"Excess lending capacity, pressure on CMBS spreads and increased market volatility over the past 15 month has significantly eroded the profit opportunity," he said.

Marty Hughes, Redwood's chief executive, attributed the repositioning to jumbo loans to the "severe volatility" in the debt markets.

"Our near-term posture is to operate defensively and cautiously," Hughes said.

In response to a question, Hughes said he is a "little disappointed" with the Federal Housing Finance Agency's decision to expel REITs from Federal Home Loan Bank membership in the next five years.

"In my opinion, this was really gnarly political," Hughes said. "And I think FHFA making this decision was just something that they wanted to get behind them. I don't think this is something we can open up again anytime soon."

Although lawmakers have raised objections, he said he doubts Congress will intervene.

"I don't think stepping in the breach and helping out on the captive issue is way up there on anybody's top list," Hughes said.

Redwood's captive insurance subsidiary borrowed $219 million in advances from the Federal Home Loan Bank of Chicago in the fourth quarter and it had $2 billion in outstanding advances as of Feb. 19.

Meanwhile, Redwood has 309 jumbo correspondent lenders, including 106 Federal Home Loan Bank members that participated in the Chicago Home Loan Bank's Mortgage Partnership Finance Direct program. The MPF Direct program allows FHLB members to originate and sell jumbos to Redwood.

Nicholas said large banks are very aggressive in pricing jumbos, but Redwood has been successful with its correspondent network and competitive in pricing.

"We have a large group of whole-loan buyers who have the same appetite for jumbos as the big banks," Nicholas said.

Redwood acquired $5.1 billion in jumbo loans in 2015 and sold $2.5 billion as whole loans. It also securitized and sold another $1.4 billion in jumbos.

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Secondary markets Jumbo mortgages GSEs Correspondent Securitization Private-label
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