Moody's mulling junior-note downgrades on 12 Redwood prime jumbo MBS deals
Concerned about rising mortgage defaults due to the coronavirus pandemic, Moody’s Investors Service on Monday said it might look to downgrade the junior-note tranches of 12 outstanding Redwood Trust prime jumbo securitizations.
In a release, the agency stated that it’s concerned that securitization payment cash flow for the notes could be disrupted by deals’ stop-advance features that limit the period in which servicers must cover principal and interest payments on delinquent loans to MBS noteholders.
The 18 notes from the dozen deals include both junk-rated and lower investment-grade bonds, and were issued via Redwood Sequoia Mortgage Trust platform between 2015-2017.
Redwood (NYSE: RWT) was the second-largest sponsor of prime-jumbo MBS deals in 2019, with eight transactions totaling $2.72 billion, according to Finsight data. The company, structured as a real estate investment trust, has sponsored more than 60 transactions of non-agency loans since 2010, totaling nearly $23 billion.
Under advance requirements, servicers advance the principal and interest payments on unpaid delinquent loans to noteholders. Such delinquencies were considered remote risks for prime-jumbo deals, which involve high-balance loans backed by strong collateral properties with substantial equity (for example, a weighted average loan-to-value ratio of 68% in Sequoia Mortgage Trust 2015-2).
But in light of the COVID-19 outbreak that has spurred worries of substantial levels of forbearance of delinquencies, Moody’s has grown concerned the 120-day stop-advance feature of the Sequoia deals could lead to a curtailment of advancements to fund the Class B notes on the deals that carry a first-loss position ahead of senior notes in the pass-through payment structure.
“While stop-advance features may lessen potential cash flow disruptions upon advance recoupment and offer greater transparency on actual collections,” Moody’s report stated, “in these transactions principal collections or liquidation proceeds cannot be used to pay interest on the bonds and there is no alternative source of liquidity to pay interest.
“As a result, in an environment where delinquencies and forbearance activities are expected to rise, this particular stop-advance feature can lead to a reduction in interest payment to these junior tranches.”
While delinquencies may be cured or loans modified during the review period, Moody’s also noted the effect that the slowing payments could have on prepayments, which provide a buildup in credit enhancement (or the value of the underlying assets over the notional value of issued bonds, which provide recovery cushions that further protect investors from payment shortages).
Moody’s did not tally the accumulated value of the notes under review, but the subordinate Class B tranches in transactions typically were under 5% of the total note allocation.