Redwood Sells $424 Million of Mortgage Debt at Wider Spreads

Redwood Trust Inc. (RWT) sold $424 million of bonds tied to new U.S. home loans without government backing at wider relative yields as issuance soars this year.

The offering completed today by Redwood, a specialist in so-called jumbo mortgages, included $299 million of debt that priced to yield 2.82 percent, or 1.90 percentage points more than benchmark swap rates, according to a person familiar with the deal who asked not to be named without authorization to speak publicly about the transaction.

Similar securities from the Mill Valley, California-based firm were sold by underwriters at spreads of 1.75 percentage points last month and as low as 0.97 percentage point in January. Relative yields have been widening as sales increase and amid investor concern that government-backed housing debt offered better value and that mortgages will prepay slower than expected if interest rates rise, or faster if they fall.

Issuance of so-called non-agency securities has been tied to more than $5.5 billion of new loans this year, up from about $3.5 billion in all of 2012, according to data compiled by Bloomberg. Sales peaked at about $1.2 trillion in each of 2005 and 2006, before the market helped spark the worst financial crisis since the Great Depression.

Fed Pace

Spreads on both agency and non-agency mortgage securities have also widened this year as investors question how long the Federal Reserve will keep up the pace of its debt buying to support the economy. Three Fed regional bank presidents called this week for phasing out the central bank’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.

While the Fed has been buying mortgage assets guaranteed by government-supported Fannie Mae (FNMA) and Freddie Mac or U.S.-owned Ginnie Mae, all types of riskier assets from stocks to junk bonds and securities tied to home loans without U.S. backing have benefited. Speculation the central bank may pull back would potentially harm demand.

Jumbo mortgages are those larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in high-cost areas. Limits range from $417,000 to $625,500 for Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net

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

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