Redwood Trust’s second jumbo mortgage-backed securitization closed last week and it showed, according to Redwood, that loans can be financed in this market with rates just 0.5% above the government-sponsored enterprise market, which bodes well for the long-awaited private market’s possible return. But the slightly higher rate does indicate at least some level of higher risks.
In assigning final ratings to the deal, Fitch gave 92.5% of the pool its top rating. But as previously reported Moody’s also looked at it and, as it has done in the past, the rating agency released opinions based on its preliminary assessment even though it did not get Redwood’s go-ahead for final rating. Also as previously reported, Moody’s highlighted earthquake risk in its initial rating but there were questions about whether this is really unusual given the aforementioned circumstance.
Here’s what Moody’s Investors Service analysts had to say.
Although the context should be considered, it still may be worth reviewing in considering the bonds.
Note that regulatory discussions in the wake of the downturn have encouraged a wider, competitive range of opinions on bonds from rating agencies. Even if the discussion does not prove the bonds’ earthquake risk is unusual, that risk is worth jumbo residential mortgage-backed securities investors’ consideration.
“This particular pool is obviously a jumbo pool and typically jumbo pools will have concentrations in California and New York, kind of the coastal areas, just by the nature of being a jumbo pool,” said Linda Stesney, managing director, Moody’s Investors Service, in an interview.
“What we found striking in this particular pool is the percentage concentration in the San Francisco MSA.
“When we got the preliminary information and looked at it, that was an unusually high concentration...You might see a San Francisco concentration or an LA concentration in a pool but this one was quite striking for us.”
“Concentrations can always add to idiosyncratic risk,” a Moody’s spokesman said in an e-mail sent to this publication. “In this case, because it’s the San Francisco MSA, it’s earthquake risk.”
Moody’s assistant vice president Rishi Salwan told this publication Moody’s evaluated the earthquake risk based on U.S. geological survey information.
“I think in a well diversified pool you don’t have such a emphasis in San Francisco MSA on it,” Stesney said. Normally in a more diversified pool, the risk “is something that is considered but it’s not something we’re elaborating on,” she said.
When asked if this is the first time the risk has been singled out in a residential mortgage-backed securities deal, Stesney said as far as she can remember it is. She indicated her memory/experience in the market dates back to the 1990s.
“Just given the lack of diversity in the pool that’s what really caused use to focus in on this particular risk,” she said. Fitch, like Moody’s, said California represents the largest concentration of loans in the pool, about 56% of it.
When asked about the extent to which earthquake insurance mitigates the San Francisco concentration risk, Stesney cited figures from the California Earthquake Authority showing “basically one in eight people have earthquake insurance.
“It’s not as prevalent as one might think and I think it really has to do with the price,” she said.
