IFR-Redwood Trust Set to Launch US$375m Private RMBS

Redwood Trust, a California-based REIT, is about to launch its second private-label RMBS of the year, a US$375.2m prime-mortgage offering called Sequoia Mortgage Trust 2011-2 (SEMT 2011-2), according to a presale report released on Wednesday by Fitch Ratings.

The REIT is the only issuer of non-agency prime-jumbo MBS since the onset of the financial crisis. It completed two previous post-crisis private-label transactions: a US$290.4m offering in February, and a US$222m deal in April 2010, which was the first private US RMBS following the crisis.

Another issuer, Springleaf Financial, a consumer lender, recently helped to reopen the subprime segment of the mortgage sector at the beginning of September when it priced a US$292m RMBS offering.

Redwood Trust executives have been outspoken about the need to revive a mortgage market backed by private capital. Fannie Mae, Freddie Mac, and the FHA currently finance nearly 95% of the US mortgage market, a figure that many experts say is unsustainable in the long run.

The deal currently being prepped, SEMT 2011-2, will be backed by 473 prime fixed-rate mortgages originated by six originators, 80% of which were originated by First Republic Bank (53%) and PHH Mortgage (27%).

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The rest of the pool was originated by Wells Fargo Home Mortgage (8%), SunTrust Mortgage (7%), PrimeLending (4%) and Sterling Savings Bank (0.9%). Distributions of principal and interest and loss allocations are based on a traditional senior-subordinate shifting-interest structure.

According to Fitch, the collateral pool consists of fully documented loans to mostly high-income borrowers with exceptionally strong credit profiles, low leverage on properties, and large reserve amounts. Third-party, loan-level due diligence was conducted on approximately 70% of the pool. Fitch reviewed the due diligence findings, and believes that the results of the review generally reflect strong underwriting controls.

Like Redwood's last transaction, SEMT 2011-2 also has exposure to properties in the earthquake-prone San Francisco region, albeit slightly less exposure than the previous offering.

This factor caused controversy for the February's deal, titled SEMT 2011-1, since Redwood originally hired Moody's to rate the issue, but ultimately disagreed with the rating agency's assessment that the deal's exposure to seismic activity-prone regions meant that it needed to be rated more strictly.

Ultimately, only Fitch received the mandate for that transaction, which contained nearly 60% exposure to California mortgage loans, with an emphasis on the San Francisco Bay Area.

The current deal has 53.6% concentration in California, and 31.3% of the properties are in the greater San Francisco area. Fitch said that it applied a penalty adjustment to the pool's lifetime default expectations to account for this exposure.

Moody's had been the sole rater of Redwood's 2010 deal, which had a much smaller concentration of California loans.

It is not yet clear whether Moody's will also be rating the current SEMT 2011-2 transaction.

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