New Jumbo RMBS Sellers Finally, Slowly Multiply

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While the recent origination jumbo securitization market is still historically small and its growth is still very slow, this is the first post-downturn year in which the number of companies that have done rated deals has notably multiplied.

At deadline there were at least six players in this category, including the original and most prolific company in the market, Redwood Trust/Sequoia.

“It’s clear that other participants do have a focus on new-issue RMBS,” according to Roelof Slump, managing director in Fitch’s residential mortgage-backed securities group. “It’s a healthy sign that there is now more than one entity involved.”

In addition to Redwood/Sequoia, other players include Credit Suisse, JPMorgan Chase, EverBank, Shellpoint/New Penn and Nomura.

Also of note in this context is originator First Republic Bank, who started with the first Redwood/Sequoia deals and has since participated in other companies’ transactions.

One thing to consider in terms of this market’s outlook is that it could be affected by changes in the rate environment, which at deadline had been trending upward, a notable change from what has been the case during much of the post-downturn period.

“Certainly rates have been low for an extended period of time,” noted Slump, when asked about whether the shift could affect the outlook.

“You may see some higher purchase percentages, but still rates are still relatively low and associated market volatility will hopefully settle down.”

To date there appears to be some competition for product and experience and variations in deals have evolved in this market among the newer players, notably—as previously reported in this publication—in the representation and warranty area.

Standard & Poor’s in a recent report suggests, “Many of these differences are because of the different sizes and types of originators and arrangers involved.

“For instance, a seller of mortgages that controls the origination process may be more willing to provide stronger R&Ws than aggregators that purchase whole loans from a wide variety of small originators.”

Also as previously noted on this publication’s website there have been some so-called hostile ratings in the post-downturn market.

From time-to-time, some ratings agencies will issue these on deals they examine but have not been chosen to rate, often contesting whether the transaction has enough credit support to cover its risk.

Proponents of the practice argue that it can help provide an unbiased view of the transactions in question, given that the opinion is provided without payment, and regulatory reform has moved in this direction.

But detractors argue that the move is still biased in that it may stem from competition between ratings agencies.

In addition to risks related to representations and warranties, these have highlighted geographic concentration risk—a somewhat typical risk for jumbos by nature as these are higher balance loans that generally come from particular high-cost markets such as California

Also a risk highlighted by ratings agencies has been alignment-of-interest risk as in cases where the secondary market seller involved does not retain any piece of the transaction, a move at odds with developing regulatory risk-retention goals.

But despite some variations in such areas analysts generally say they find that jumbo collateral quality still has not migrated very far from pristine. There have been some other risks of note but like geographic concentration risks these tend to be risks somewhat typical of the jumbo sector such as borrowers with loans on multiple properties.

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