Things are looking up for Redwood Trust (RWT). The real estate investment trust reported Thursday that its net income nearly tripled from the second quarter to the third quarter, rising from $16 million in the second quarter to $45 million in the third quarter.
The REIT also disclosed in its earnings statement that it recently entered into a risk-sharing agreement with Fannie Mae in September.
Under the agreement, Redwood will absorb the first 1% of credit losses on $1.1 billion of new conforming loans it plans to sell to Fannie in the fourth quarter.
“This risk-sharing arrangement provides a strong, direct alignment of interests between Redwood and Fannie Mae for the acquisition and sale of high-quality mortgage loans,” Redwood’s CEO Martin Hughes and President Brett Nicholas said in a letter to shareholders.
“Additionally, this transaction is expected to reduce taxpayer risk through an upfront credit risk transfer and by increasing the role of private capital in the mortgage market, which is one of the goals set forth in the 2014 Federal Housing Finance Agency Scorecard issued by the FHFA. We hope that it is the first of many such transactions for Redwood.”
During his first public speech as FHFA Director, Mel Watt said that he has instructed Fannie Mae and Freddie Mac to transfer more risk and reduce their retained portfolios.
“We have reformulated this goal so that it no longer involves specific steps to contract the Enterprises’ market presence, which could have an adverse impact on liquidity. Instead, the reduce goal focuses on ways to scale back Fannie Mae and Freddie Mac’s overall risk exposure,” Watt said in May. “This approach allows us to meet our mandates of upholding safety and soundness and ensuring broad market liquidity.
“While FHFA has reformulated this strategic goal, our strategies to reduce taxpayer risk build on much of FHFA’s past work in this area. This includes having Fannie Mae and Freddie Mac conduct additional credit risk transfers for their single-family credit guarantee business. These transactions have opened up private capital to share in credit losses, which protects taxpayers from bearing all of the potential losses.”
Throughout the year, Fannie and Freddie have explored various risk-sharing methods. Fannie has offered up four risk-sharing deals under its under its Connecticut Avenue Securities platform. Its last Connecticut Avenue offering was its largest, checking in at $2.05 billion.
Late last month, Fannie partnered with JPMorgan Chase (JPM) to offer up a new credit-risk sharing deal.
Fannie partnered with JPMorgan to launch a new risk-sharing vehicle, J.P. Morgan Madison Avenue Securities Trust. The first offering in the series checked in at $989 million, but there are differences from the Fannie’s previous risk-sharing offerings, according to Fitch Ratings’ presale report.
Fitch said that the deal will simulate the behavior of an approximately $989 million pool of JPMorgan-originated mortgage loans that will secure Fannie Mae-guaranteed mortgage-backed securities.
But there are several key differences, Fitch said. According to Fitch’s report, the bonds will be issued from a special-purpose trust whose security interest consists of the cash collateral account, an interest account, a retained interest-only strip and a reserve account, all of which will be used to pay principal and interest on the notes, instead of Fannie issuing the notes itself.
Now, Fannie has partnered with Redwood on this $1.1 billion deal and Redwood hopes there are more risk-sharing deals to come.