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Redwood strikes early, setting the stage for more private-label RMBS

Redwood Trust()

As such, Paul Miller of FBR Capital Markets believes the real estate investment trust will be able to generate a significant amount of securitization in 2013 and beyond. 

“With Redwood being one of the only ways to play a return of private capital into the mortgage market, we see significant upside potential for both the company’s earnings and its dividends over the next two years,” Miller explained.

Such expectations are based on continued low rates and modest multiple expansion given that there will be increasing momentum in the housing recovery and return of private capital to the mortgage industry.

While Redwood’s (RWT) mortgage banking profits have become a significant contributor to earnings over the past year, the company’s bottom-line earnings and book value continue to be driven primarily by its spread income, the report explained.

“With an increasing available-for-sale portfolio, higher income generation from warehouse lines and securitized pools, and a desire to increase commercial production, we believe Redwood’s ability to generate significant RMBS 2.0 securitizations going forward is the primary value driver at the company,” Miller explained.

One of the primary concerns with Redwood has been whether or not private capital would be able to compete with the now dominant Fannie Mae and Freddie Mac platforms.

Similarly, Martin Hughes, CEO of Redwood, explained “the problem is the risk posed by private investment capital to investors. They aren’t convinced that the market has stabilized enough or is sustainable.”

With g-fees rising faster than anticipated, plus the Federal Housing Finance Agency’s desire to decrease the market share of both government-sponsored enterprises in the space through the use of risk-sharing, the pace of securitizations is likely to increase. 

“This should provide a sufficient number of securitizations to ‘feed the machine’ for the company’s securities portfolio, with an eventual shift from its legacy senior securities to subordinate securities retained from the company’s SEMT securitizations,” Miller explained.

Overall, FBR Capital Markets firmly believes Redwood is one of the best ways to play as the market braces for the eventual return of the private-label mortgage securitization market.

Market consensus would agree that Redwood is a driving force in the sector, meeting their monthly issuance goal.

The REIT issued its seventh deal of the year this week, which showed that the borrowers in the pool have substantially higher credit scores, more home equity and lower debt-to-income ratios, Standard & Poor’s explained in its pre-rated summary.

“The senior classes benefit from a credit support floor, whereby the principal allocation to the subordinate classes is reduced to zero on any distribution date where the subordinate certificates’ aggregate balance is less than 1.15% of the original collateral balance,” the credit rating agency explained. 

cmlynski@housingwire.com

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