Redwood Plans Second Mortgage-Bond Deal in Market of 2011

Redwood Trust Inc., the only issuer of new home-loan securities without government backing since the market froze, plans to sell bonds tied to $375 million of so-called jumbo mortgages, in the second deal this year.

The loans, whose balances average $793,292, were acquired from six lenders, with 80 percent from First Republic Bank and PHH Mortgage Corp., Fitch Ratings said today in an e-mailed report. Almost $348 million of the securities are expected to get the top credit grades, the ranking company said.

Redwood, an investment firm based in Mill Valley, California, has conducted the only three securitizations of new U.S. mortgages since the market seized up in mid-2008 amid soaring defaults, tumbling home prices and a global financial crisis. The firm packaged $534 million of loans into securities in the deals, after annual issuance of non-agency home-loan bonds peaked at about $1.2 trillion in each of 2005 and 2006.

“The market is still thawing from its deep freeze,” Martin S. Hughes, the company’s chief executive officer and president, told lawmakers during a Sept. 7 hearing in Washington. Redwood, which issued mortgage securities in February, expects to do two more deals this year, he said.

Hurdles to the mortgage-bond market’s revival include demand from banks for loans to hold on their balance sheets and government programs “crowding out” private financing, he said.

Michael McMahon, a spokesman for Redwood, declined to comment on its latest deal.

Lawmakers Consider

Jumbo mortgages are larger than government-supported Fannie Mae and Freddie Mac can finance, from $417,000 in most places to $729,750 in high-cost areas, a limit that is set to decrease on Oct. 1 unless lawmakers renew it.

Loans bought or guaranteed by the Fannie Mae, Freddie Mac or the Federal Housing Administration have accounted for about 95 percent of new home lending since 2009. BlackRock Inc., the world’s largest money manager, and Two Harbors Investment Corp., an investment firm run by Pine Rive Capital Management LP, are among companies that have said they are also seeking loans for non-agency securities, which lack government backing.

Lawmakers have been considering how the $10 trillion U.S. housing-finance market should evolve. A Senate panel yesterday questioned three professors and Peter J. Wallison, a member of the Financial Crisis Inquiry Commission, on whether the market requires government guarantees.

Key Issues

The mortgage-bond market has to “resolve several key regulatory and market issues, including reform of underwriting and servicing standards, greater investor protections, and addressing the second mortgage problem,” Redwood’s Martin said last week during a House subcommittee hearing, referring to borrowers’ ability to reduce home equity with additional loans after their mortgages are originated.

Richard Green, chairman of the Lusk Center for Real Estate at the University of Southern California, said at yesterday’s hearing that explicit government guarantees of mortgage lending are necessary. He pointed to a recent experience obtaining a jumbo mortgage in the private market.

“It was very striking to me because when my wife and I got our first mortgage, when we had our jobs for a year and all we had in the bank was a down-payment and that was it, it took like two days to get approved,” he said. “It took us four months to get approved on our jumbo non-cashout refinance.”

Wallison, the FCIC member who wrote a dissenting report blaming the government for the financial crisis, argued yesterday the mortgage market can be left to private firms.

Junk Bonds

“There’s $13 trillion in fixed-income investments made by institutional investors,” said Wallison, a fellow at the American Enterprise Institute. “They’re looking for more fixed-income investments of various kinds of course.” Their willingness to take credit risk is shown in purchases of corporate bonds with junk ratings, he said.

Speculative-grade, or junk-rated companies, have raised $201.3 billion of bonds this year, after $287.6 billion last year, the most ever, according to data compiled by Bloomberg

Almost $17 billion of non-agency home-loan bonds were created in the first half of this year, down from more than $31 billion last year, as banks and investment firms repackaged older securities and created notes backed by troubled or seasoned loans, according to newsletter Asset-Backed Alert.

Redwood may sell the AAA rated securities on its latest deal at projected yields over benchmark rates of 2.4 percentage points to 2.5 percentage points, according to a person familiar with the deal who declined to be identified because the transaction is private. The firm may also sell $10.3 million of AA rated bonds, the person said.

Borrowers in the Redwood deal have average annual income of $537,000, and almost 90 percent have liquid assets equal to more than two years of their monthly mortgage payments, according to Fitch. Credit scores average 773 and average combined loan-to-value ratio is 64.2 percent, the firm said in its report.

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