Redwood Trust Inc., a specialist in so-called jumbo mortgages, plans to sell securities tied to $328 million of new U.S. home loans, the second sale this year of such bonds without government backing and only the fifth since credit markets seized in 2008.
The offering is being managed by Barclays Plc, according to data compiled by Bloomberg. Kroll Bond Rating Agency will assign top rankings to $305 million of the debt, the New York-based credit grader said in a “pre-sale” report released today.
“Redwood is incentivized to maintain its focus on loan quality as it retains an interest in the securitization through its ownership of subordinate securities,” Kroll analysts including Glenn Costello and Eric Williamson said in the report.
Redwood issued all four of the previous non-agency deals since the market collapsed as prices tumbled, foreclosures soared and home values plunged, helping spark the worst financial crisis since the 1930s. Those Redwood transactions, which packaged $1.3 billion of loans, compare with record issuance of about $1.2 trillion in each of 2005 and 2006.
Michael McMahon, a spokesman for Mill Valley, California-based Redwood, declined to comment.
In the planned 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 Kroll. About 10 percent allow borrowers to pay only interest for 10 years. The average “verified” income of borrowers is about $44,000 a month.
Jumbo mortgages 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, the limits range from $417,000 in most places to $625,500.
A “potential risk that arises from a pool of mortgages to affluent borrowers is due to the presence of very large loans,” Kroll said. The six largest loans in the Redwood pool are each more than $2 million, concentrating risk. Additionally, the “valuations of luxury homes can be complex and potentially subject to more volatility than conventional properties.”
First Republic Bank originated almost half of the loans being pooled into the securities, with the mortgage company PrimeLending accounting for 20 percent, according to the report.