Redwood Trust champions non-QM securitizations

"Satisfied with the execution and investor reception"

As more lenders start offering non-qualified mortgages, Redwood Trust (RWT) decided to widen its credit box and accept non-QM loans for it private-market securitization platform.

This is positive news for the industry since most lenders are opting to keep the non-QM loans on their books, hoping that the demand from investors will come.  

Currently, there is $50 billion estimated in non-QM volume origination a year, which should create a significant net demand for private label mortgage-backed securities and whole loans, according to Ying Shen and Richard Mele, research analysts with Deutsche Bank (DB).  

But as of yet, Redwood Trust is one of the few companies to add non-QM loans into its securitizations.

This is the plan that Redwood will follow until there is more meaningful reform of the government-sponsored enterprises, Fannie Mae and Freddie Mac.

The executives indicated that the model of private investors taking the first-loss credit risk ahead of an implicit government guarantee is likely to replace the GSEs. They indicated that they would like to be a major player in the former portion of that reform.

In its second quarter 2014 Redwood Review, the company said, “We continued to make progress on non-QM loans and conforming loan risk-sharing during the second quarter of 2014.”

Redwood included a small number of non-QM loans in its July Sequoia securitization and was satisfied with the execution and investor reception.

As a result, in early August it expanded the menu of jumbo loan products it acquires to include non-QM loans with characteristics similar to those of jumbo loans it has historically acquired prior to the implementation of the QM rule in early 2014.

“We have widened our credit box for jumbo mortgages to include loans with DTIs up to 50% and we intend to buy and securitize such loans, similar to what we did prior to the implementation of the QM rule. We included three such loans in our most recent securitization and we expect to include more in the future,” Mike McMahon, managing director with Redwood Trust, said.

Redwood Trust reported a second-quarter net income Thursday of $16 million, or $0.18 per share, compared to a net income of $12 million, or $0.14 per share, for the first quarter 2014, and $66 million, or $0.71 per share, for the second quarter of 2013.

“Private-label securitization activity remained subdued during the second quarter of 2014, but showed signs of improvement. Our recent July Sequoia securitization was met with strong investor interest and the triple-A rated securities priced at spreads that were tighter than our April 2014 securitization,” the review said.

“When we consider the profitability, franchise value, and ability to create investments for our investment portfolio, Sequoia securitization execution is becoming more competitive with whole loan sales, which significantly outpaced securitization activity in the first quarter of 2014,” it continued.

Impac Mortgage (IMH), Caliber Home Loans and RPM Mortgage are a few of the lenders that have decided to publicly announce they will start providing non-QM loans.

"In the new regulatory climate, we are seeing that a certain segment of financially sound borrowers is having difficulty finding loan products that suit their needs,” RPM's founder and CEO, Rob Hirt, said.  

“To support these homeowners and borrowers in our communities, RPM has created programs that will help them secure a loan that meets their financial requirements without being penalized with an exorbitant interest rate," Hirt said.

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