Moody's Investors Service put out a special report on the latest Redwood Trust (RWT) residential mortgage-backed securities offering this week, citing the risk of declining property values if an earthquake were to strike the San Francisco area. Redwood filed a prospectus with the Securities and Exchange Commission on Tuesday, detailing its offering of a $290 million RMBS backed mostly by jumbo mortgages. It is just the second private-label RMBS issued since the financial crisis of 2008. According to the prospectus, Redwood terminated an application with Moody's when it disagreed with the credit rating agency's preliminary assessment. Moody's made that assessment available Thursday. More than 56% of the loans were originated in California with 8% of them originated in New York, the next highest state. Moody's said the pool is more exposed to earthquake risk than most RMBS pools given the concentration of the principal balance located in California, specifically the San Francisco area. "If a major earthquake were to strike the San Francisco MSA, the decline in the values of damaged properties, and the likelihood that borrowers could abandon properties whose value has plummeted, will likely result in either losses to senior certificate holders or deterioration of the credit quality of the notes to junk status," said Moody's Managing Director Linda Stesney. Moody's cites an April 2008 U.S. Geological Survey that shows a 63% chance of a magnitude 6.7 or higher earthquake in the San Francisco bay region before 2038. Moody's ran various scenarios to determine the potential loss to triple-A rated portions of the Redwood deal and found that if the earthquake occurs in the fifth year of the deal, the prepays at the rate of 10% per year, 80% of the borrowers in the San Francisco MSA would default and the recovery on the damaged property would be 30% of the house prices. "This is unusual in looking at the San Fran MSA," Stensey said in an interview with HousingWire. "This really goes beyond what we've seen traditionally." A spokesman for Redwood said the company will not comment on deals before closing. This one is scheduled to close March 1. Write to Jon Prior. Follow him on Twitter: @JonAPrior