Redwood Trust (RWT)
closed a $237.8m prime jumbo residential mortgage-backed security (RMBS) sponsored by its wholly-owned subsidiary, RWT Holdings
. The deal marks the first private-label RMBS in the US since 2008, and is already bringing about disagreements from the credit rating agencies on the strength of predicted performance.
originated the 255 underlying first-lien mortgages in 2009, Redwood said. The first prime jumbo RMBS in years has been praised by the industry
for beginning to thaw the jumbo market.
"This transaction has broken the ice in the private mortgage securitization market, which has been essentially frozen since 2008," said Brett Nicholas, chief investment officer of Redwood Trust, in a press statement Wednesday
Moody's Investors Service
rated the most senior securities in the deal -- representing 93.5% of the principal amount -- triple-A, Redwood said. But fellow credit-rating agency Standard & Poor's
is warning investors of the possible risks associated with the pool characteristics.
Moody's assigned ratings from triple-A to double-B 2 on five certificates issued by the Redwood RMBS, formally Sequoia Mortgage Trust 2010-H1. Moody's expects cumulative net loss of 0.5% on the pool, the credit-rating agency said. The 6.5% subordination on the triple-A certificates is driven by both collateral and structural analysis.
"The transaction is backed by high quality prime loans, employs a highly simplified structure compared to past transactions, has a strong governance mechanism with respect to representation and warranties, has good alignment of interests and benefited from a third party review of every loan in this collateral pool," Moody's said in an e-mailed statement.
Standard & Poor's (S&P) on the other hand said that, while the loans have never been delinquent and the borrowers have a weighted average credit score of 768, the average balance of $932,699 poses a "concentration risk."
In RMBS ratings criteria released in September 2009, S&P established a 7.5% credit enhancement "as an anchor point" for a typical pool of prime mortgages it will rate triple-A. But the Redwood RMBS bears only 6.5% credit enhancement.
"If 33 average-sized loans or the 19 largest loans in the pool were to default at a 50% recovery (the weighted average original LTV ratio is 56.57%), we estimate that either scenario would result in the complete write-down of all the subordinate classes, which provide 6.50% credit enhancement to the senior class," S&P said in e-mailed commentary Wednesday.
The pool consists of entirely five-year adjustable-rate mortgages, S&P noted, which means the loans will experience reset risk after five years, when the initial fixed rates become adjustable. Nearly 74% of the loans contain a 10-year interest only period, indicating 74% of the borrowers will experience additional reset when the loans become fully amortizing.
"If mortgage rates rise, property values remain flat, and the extension of credit is limited, we believe borrowers may face difficulties refinancing," S&P said.
Write to Diana Golobay
Disclosure: the author holds no relevant investments.