Redwood Trust's fourth residential mortgage securitization of the year is backed entirely by 15-year, fixed-rate loans.
The $337 million Sequoia Mortgage Trust 2015-4 is also the first transaction since Redwood Trust established the platform in 2009 to include a significant portion of loans (75.5%) originated by UBS Bank, according to Kroll Bond Rating Agency. First Republic Bank, a regular contributor to Sequoia collateral, accounts for another 13.3%.
KBRA has assigned preliminary AAA ratings to the senior tranches of notes to be issued by the trust; all of these tranches benefit from credit enhancement of 10%.
The loans have an average balance of $604,000, which KBRA noted is small relative to the approximately $700,000 average in previous SEMT transactions. It said this is partly due to both the amortization of the loans in the pool, which are seasoned by 27 months, on average, and the pool's relatively low weighted average loan-to-value ratio of 57.4%.
"Fifteen-year mortgages are often selected by borrowers who are more financially secure, as the higher monthly payment requires higher income to qualify," the report states. "In turn, these loans tend to achieve larger equity build-up and because of this, historically, the performance of 15-year collateral has outperformed that of similar 30-year term mortgages."
Despite the smaller average loan size, however, SEMT 2015-4 has 14 loans with current balances exceeding $1.5 million, representing 7.24% of the mortgage pool. So-called super-jumbo loans are considered risker if only because a default by a single borrower puts at risk a relatively large portion of the overall pool.
Approximately 27.2% of the mortgages in SEMT 2015-4 fall under the scope of the ability-to-repay rule, of which just 23.58% qualify for a legal safe harbor. That leaves 20 mortgages totaling 3.63% of the pool at greater risk of litigation-related losses. KBRA increased its expected loss for the AAA rated tranches by less than 1 basis point to account for this risk.
The remaining loans, accounting for 72.8% of the outstanding pool balance, are not subject to the ability-to-repay rule, either because they were originated as investment properties (1.82%) or they predate the rule's effective date (70.98%).