Redwood Sells Fifth Mortgage Bonds Since 2008 as Sales Thaw

Redwood Trust Inc. (RWT) sold bonds tied to about $325 million of new home loans in the fifth offering of securities without government backing since the market froze in 2008, according to a person with knowledge of the transaction.

The company sold a $163.6 million, top-rated portion yesterday to yield 1.8 percentage points more than benchmark swap rates, said the person, who declined to be identified without authorization. The Mill Valley, California-based company placed similar debt at a spread of 1.9 percentage points in its first transaction this year in January.

Redwood’s offerings since the financial crisis, the only ones in the market, have been backed by about $1.6 billion of loans. Issuance peaked at $1.2 trillion in each of 2005 and 2006 before the market collapsed as foreclosures soared and home values plunged. Government-supported programs and bank demand restraining interest rates on loans are helping to erode the potential profits for issuers that seek to make money from retaining the lowest-ranking portions.

“We’ve reverse engineered a lot of the transactions and prefer the return on equity, in terms of the risk-reward, of pre-existing mortgage-backed securities,” MFA Financial Inc. (MFA) President William Gorin said in a March 23 telephone interview. His New York-based real estate investment trust buys both agency mortgage bonds and non-agency debt lacking government backing.

May Be ‘Early’

The so-called credit enhancement, or protection against defaults for investors, on the top-rated portion of the Redwood deal fell to 7.2 percent from 8.3 percent in the January offering, according to reports from Fitch Ratings. That change, and tighter spreads, potentially increase the returns to the lowest-ranked slices.

“We believe mortgage securitization will play a very significant role” as the U.S. seeks to reduce the market share of government-supported bond guarantors Fannie Mae and Freddie Mac, said Michael McMahon, managing director of investor relations at Redwood, which is also a REIT. “We may be a bit early in rebuilding our conduit, but we have made significant progress in the number of clients we’re buying loans from and we’re very happy with the results.”

McMahon declined to comment on the specific transaction yesterday. The offering was managed by Barclays Plc, after Credit Suisse Group AG led the previous three sales, according to data compiled by Bloomberg.

Redwood specializes in so-called jumbo mortgages, which are larger than what’s allowed in government-supported programs, currently as much as $729,750 for single-family properties in some areas. For Fannie Mae and Freddie Mac loans with the lowest costs for borrowers with 20 percent down payments, limits range from $417,000 in most places, to $625,500.

Loan-to-Value

Government-supported lending accounted for 88 percent of new mortgages and home-equity loans last year, with other debt of more than $417,000 representing 8.7 percent of the total, according to newsletter Inside Mortgage Finance. That jumbo share rose to 9.3 percent last quarter as Fannie Mae and Freddie Mac loan limits fell.

In yesterday’s deal, the underlying 30-year fixed-rate loans have balances that average $895,998, loan-to-value ratios of 63.5 percent and borrower credit scores that average 768 on a scale from 300 to 850, according to a “pre-sale” report by Kroll Bond Rating Agency.

Kroll and Fitch assigned top grades to $305 million of the debt, making it more attractive to investors such as banks, which hold loss less capital against higher-ranked securities.

The spreads weren’t attractive enough to entice TCW Group Inc. to consider buying, said Bryan Whalen, co-head of mortgage bonds at the Los Angeles-based firm, which oversees $124 billion of assets.

“We’re not really ratings-driven, so we find better value in the legacy paper,” he said in a March 23 telephone interview.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net, or Christopher DeReza in New York at cdereza1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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