Redwood expects another private RMBS in coming months
Redwood Trust (RWT) currently holds $570 million in mortgages for another security it plans to issue late in 2011 or in the first quarter of next year. The real estate investment trust is the only issuer of a private-label residential mortgage-backed security since the financial crisis struck in 2007. Redwood's last offering was a $368 million jumbo securitization in September. The previous one was a $290 million offering completed in March. In its third quarter note to investors released Thursday, Redwood said competing with the largest banks and the government for loans and the still evolving rating process has kept privately funded RMBS levels nearly dormant. Redwood competes with Fannie Mae and Freddie Mac for its supply of jumbo loans. On Oct. 1, though, Redwood gained an advantage when the conforming loan limit dropped to $625,500 from $729,750 in the most expensive neighborhoods. The REIT said in its report to investors that 10% of the loans it plans to purchase and use for securitization would have been eligible for sale to the GSEs before the limits dropped. It is the first hard evidence that the private market will be able and has some appetite to move in where the GSEs exit. Extreme market volatility as of late has sent interest rates and credit spreads to historic lows and quick rebounds, especially this quarter, have been added to the list. "Redwood continues to be the only entity issuing new prime nonagency securities. On one level we are surprised to be the only active issuer; on another level, given the headwinds we have battled, we are not surprised," the REIT said in its third-quarter report to investors Thursday. Redwood earned $1 million, or 1 cent a share, down from a $20 million profit one year ago. The company pointed to declining interest rates was the primary cause for decline. Even though serious delinquencies were relatively flat, Redwood increased its loan loss provision to $4 million from $2 million in the previous quarter. Its mark-to-market adjustment on derivatives — used to manage and hedge against the risk it takes while it holds the mortgages on its books before securitization — resulted in a $13 million hit in the quarter. The risk arrives as soon as Redwood locks in the interest rate on the mortgage it plans to acquire. The company said over time, as volume through its conduit business grows, this time span will shrink along with the risk of interest rate volatility. Write to Jon Prior. Follow him on Twitter @JonAPrior.