Redwood Trust is starting to feel like the Maytag repairman of the jumbo MBS market: it sits all alone with no company.
Then again, the publicly traded REIT has no trouble being the only firm issuing jumbo MBS the past two years (four deals and counting) with a few more on the way. Sometimes, when you’re the only player in a business it can be a good thing (no competition), but the rest of the market would love to see more issuers of jumbos, especially if it primes the pump for a PLS revival.
As far as the calendar is concerned the only other firm that plans to issue a jumbo security in the first half is Two Harbors Investment Corp., which is also a public REIT. But will it happen?
Few jumbo lenders I’ve spoken to know much about Two Harbors, and say they are reluctant to sell to a company with no track record.
“The big question is not Two Harbors,” said trader David Akre of Whole Loan Capital, New York, “it’s who comes after Two Harbors.”
And therein lies the problem. Some jumbo executives note that a revival in bond issuance continues to be stifled by excess liquidity in the banking sector. The nation’s depositories hold roughly $1.5 trillion of excess deposits that it has a hard time putting to use. So, instead of investing in, say government debt, they can originate jumbo home mortgages (balloons or 30-year loans), keep them in portfolio and earn a whopping 400 basis points, at least, on their investment.
If the bank has a cost of funds of 75 basis points (for example) and it’s funding jumbos at 4.75% anyone with a brain in their head can see that it’s fantastic deal. Why, oh why, would anyone sell jumbos, especially if they were made with 20% down to high net worth individuals, which is what most loans are being funded at.
Another issue is pricing. According to Akre, Redwood might be paying a one-point premium for jumbos in the secondary, but one point is hardly seen as something to jump at. “I know of a couple of banks that are paying 90 cents for legacy product—and it’s performing,” he said. “If you go to a hedge fund they’ll only give you 65 cents.”
As one secondary market executive put it: “There’s no incentive to sell right now and I don’t see the situation changing much over the next year, maybe over the next two years.”
Redwood, though, has spent quite a bit of time developing its Sequoia Mortgage Trust program, including pounding the pavement, convincing lenders to sell and courting new mortgage banking clients.
It helps if a secondary market buyer is working with nonbanks because these firms need an eventual takeout—unless they’re already selling to Wells Fargo & Co. (One of Redwood’s sellers is PHH Mortgage, a top-ranked nonbank.)
But Redwood and Two Harbors must both compete against Wells and other bank buyers. On the surface it might appear that nonbank REITs have no chance competing against depositories, but they do.
One investor close to the situation noted, “There are still inefficiencies in the market which allows Redwood to buy,” he said. “And not all sellers look at all the rate sheets.” Still, Redwood’s deals have been relatively small, ranging in size from $200 million to $290 million. Its latest deal, unveiled a few weeks ago, is a bit larger at $400 million.
“Redwood is making progress,” said a manager close to the company. “They made a decision to get in and have stuck with it. Others haven’t.”
Meanwhile there is scattered talk that one or two of the nation’s largest banks might issue a jumbo MBS later in the year.
