Mortgage-Bond Sales Rise as Redwood Leads U.S. Issuance RevivalJody Shenn
Redwood Trust Inc. sold bonds tied to $398 million of U.S. home loans without government backing and is working on a second deal this month as the real-estate investment trust leads a revival in sales of the securities.
Redwood’s latest offering tied to so-called jumbo mortgages was underwritten by Barclays Plc and included $368.8 million of debt granted top grades by Moody’s Investors Service, Kroll Bond Ratings Inc. and Fitch Ratings, according to a person familiar with the transaction who declined to be identified because they weren’t authorized to speak about the sale.
Deals tied to new loans reached $3.5 billion last year, from less than $700 million in 2011 when Redwood was the only issuer. Volumes are rising after the size of mortgages that government-supported Fannie Mae and Freddie Mac can finance fell and their bond-guarantee fees increased, while investors flock to assets with potentially higher returns as the Federal Reserve suppresses yields on notes with less default risk. As banks seek loans for their portfolios, that’s limiting bond issuance.
“Banks simply do not have enough financial incentive to securitize,” FTN Financial strategists led by Walt Schmidt wrote in a 2013 outlook published Jan. 3. “However, for non-bank entities, such as REITs, the same deal has the potential to make economic sense.”
The latest sale by Mill Valley, California-based Redwood followed its six last year that packaged almost $2 billion of jumbo mortgages, according to data compiled by Bloomberg. Credit Suisse Group AG joined it as the only other issuer in the market, with three deals in 2012.
Royal Bank of Scotland Group Plc may begin marketing a separate Redwood offering it’s been hired to underwrite as soon as this month, according to a person familiar with that deal, who declined to be identified because terms aren’t set.
Michael McMahon, a Redwood spokesman, declined to comment.
Sales of so-called non-agency home-loan bonds peaked at $1.2 trillion in both 2005 and 2006 before collapsing as their prices tumbled amid soaring foreclosures and plunging real-estate values. JPMorgan Chase & Co. forecasts $20 billion to $30 billion this year.
EverBank Financial Corp., which originated 36.9 percent of the loans in the latest Redwood deal, according to Moody’s, has said it may also become an issuer, along with Lewis Ranieri’s Shellpoint Partners LLC and Two Harbors Investment Corp., a REIT.
Banks including Everbank, which retains the new adjustable-rate jumbo mortgages it makes, prefer to sell off fixed-rate debt as they use variable rate funding such as deposits, Joseph B. Long, an executive vice president, said last month.
Issuance of home-loan securities backed by Fannie Mae, Freddie Mac or U.S.-owned Ginnie Mae, which are financing about 90 percent of new lending, totaled $1.7 trillion last year. The Fed last year bought about $500 billion, driving rates on typical new mortgages to record lows to bolster the economy.
The muted gains in non-agency volumes contrast with the $52.2 billion of new securities backed by widely syndicated U.S. speculative-grade corporate loans last year and about $40 billion of U.S. commercial-mortgage bonds, data compiled by Bloomberg show. Non-government securitizations froze in late 2008 amid the worst financial crisis since the 1930s.
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.
Fannie Mae and Freddie Mac’s upper limits fell from $729,750 in 2011, even as the Federal Housing Administration retained that cap. The companies last year also increased how much they charge to guarantee bonds by an average of 0.2 percentage point, almost doubling the costs.
Redwood is now able to offer better rates on some loans they can finance, McMahon said in November. It may become even more competitive this year because the companies’ regulator has pledged further fee increases, he said. A $217.2 million top-rated portion of its latest deal with a 1.86 percent coupon priced at par, according to the person familiar with the offering.
Moody’s assigned top grades to less of the Redwood transaction than in its previous deal, a step that can lower the REIT’s returns on the junior-ranked slices it typically retains, according to a pre-sale report.
Risks included dangers created by a concentration of loans from San Francisco and the deal’s structure, such as it having two sets of senior bonds that are each linked to separate pools of mortgages, according to the report. Third-party due diligence firms’ reviews of loan files also showed potential issues with a “few” of them.
The ratings firm said the securities were backed by mortgages with “strong credit characteristics and underwritten pursuant to strong underwriting guidelines.” Loan-to-value ratios averaged 66.7 percent, with credit scores of 760 out of a possible 850.