Redwood Trust began marketing Sequoia Mortgage Trust 2013-12 earlier in the week. The deal follows the Oct. 22
Shellpoint instead opted to sell the underlying whole loans and made its decision based on the “substantial pricing disconnect” between the whole loan and new issue RMBS secondary markets.
Redwood is confident that its latest RMBS deal will get priced because the deal is backed by “higher coupon mortgages that will be priced more favorably by investors,” the mortgage REITsaid Thursday during its 3Q 2013 conference call.
Current mortgage interest rates, because they are much higher, have created a new, much longer, expectation for the duration of securities backed by lower coupon mortgages. “For instance an initial expectation of a five- to seven-year investment period may now be an eight to 10 year investment period,” said Redwood. “Investors are demanding more yield (lower prices) to compensate for additional duration risk.”
Citigroup, who was also in the market at the end of October with a $210 million RMBS deal called Series 2013-J1, reportedly sold its entire deal.
The structure offered investors $189.5 million super senior, AAA notes and $6.8 million AAA-rated, class A-2 tranche. The structure is offering $2.2 million of AA-rated class B-1 notes, $2.1 million of A-rated class B-2 notes, $735,000 of BBB-rated class B-3 notes and $5.2 million of BB-rated class B-4 notes.
The deal, said one person familiar with the transaction, was not reduced in size and “there was abundant demand for all classes, including the AAAs.”
Redwood explained during its call that investors in triple-A rated RMBS will view securities backed by “more recently originated, higher coupon mortgages more favorably from a pricing standpoint.”
“This should help revive RMBS issuance,” said the issuer.
Redwood expects its loan sale distribution to be a combination of direct whole loan sales and securitizations in the near term, but the issuer said that “private securitization is our preferred source of loan distribution as it allows us to create attractive, home-cooked’ credit and interest-only investments for our portfolio.” Whole loan sales generate a one-time fee only.
Redwood has completed 20 securitization transactions since 2010. These have created over $500 million of investments for its portfolio. The mortgage REIT completed three Sequoia securitizations totaling $1.2 billion in the third quarter, as compared to four securitizations totaling $1.8 billion in the second quarter. Redwood completed $600 million of whole loan sales in the third quarter, as compared to $286 million in the second.
The mortgage REIT also is looking at possibly acquiring and distributing, maybe through securitization, “safe, well-underwritten mortgages made to good borrowers that do not meet the technical definition of a “qualified mortgage” under the new Consumer Financial Protection Bureau rules that go into effect in early January 2014.
