Presale reports on the latest deal from the only consistent, current issuer of recent origination private-label mortgage-backed securities highlights its inclusion of relatively shorter-term loans.
Glenn Costello, senior managing director at Kroll Bond Rating Agency, said the inclusion of relatively shorter-term loans is probably the most significant difference in the transaction compared to the previous Sequoia deal. Kroll rated the senior tranches of the transaction.
“There is a higher percentage of 15-year collateral, that helps the ultimate performance,” said Roelof Slump, a managing director at Fitch Ratings, which rated both the senior bonds in the deal and four of the subordinate tranches Sequoia affiliate Redwood chose to retain.
“The inclusion of more 15-year loans is positive,” said
She noted that based on concerns including certain exceptions to Redwood’s underwriting that were identified in reviewing the reports provided by two third-party review firms, Moody’s added “about 25 basis points” of credit enhancement to the top-rated Aaa tranche. But Muni said this was offset by the 15-year loan benefit.
Other attributes highlighted in the reports included an increase in the number of smaller originators in the deal, a slight increase in loan-to-value ratio from the previous transaction as well as a slight decrease in the California concentration.
Costello noted that while the California concentration has been fairly high across the securitization program it has come down a little in the most recent deal.
In terms of geographic diversification, there is a “little less emphasis on California and San Francisco, and a little more in Texas,” Slump said.
Muni said the California concentration is slightly lower than the last Sequoia transaction, but Moody’s analysts don’t think it is material enough to affect credit enhancement levels. The San Francisco concentration is up slightly, while the Los Angeles concentration is slightly lower, according to Moody’s.
While the loan-to-value ratio is slightly lower than the previous deal’s, over the long-term the LTV has been trending upward in the Sequoia transactions, Muni said. As noted in a previous online article about the transaction, Moody’s also noted that there was a larger concentration in higher LTVs even though the weighted average was lower in this deal than the previous one.
Costello said there is some more confidence in the weighted average LTV, which is down slightly in the latest deal, in part because there are signs of some relative signs of recovery in the housing market.
This is something the Federal Open Market noted even as it decided last week to embark on a third round of quantitative easing agency mortgage-backed securities purchases to lower rates and further stimulate the economy, citing employment concerns.
It appears this is factoring into ratings. Slump noted that Fitch’s criteria takes into account in sizing up risk at the loan level and determining credit enhancement based on not only the verified LTV, but also where the property is located, and to the extent to which property prices in that area are “sustainable,” in terms of whether an area is prone to depreciation or not.
Slump also noted that the most recent transaction has a larger number of smaller originators in it than in previous Sequoia deals.
“We’ve seen more smaller originators” but “with the benefit of 100% due diligence” this is less of a concern, he said.
“One hundred percent diligence helps us get comfortable” with the smaller originators, said Slump.
