12/14/2012

Redwood Ramping Up Jumbo-MBS Output

Look for Redwood Trust to more than double its production of jumbo-mortgage securitizations next year.

A roughly $300 million offering is expected to price around Jan. 15, with Barclays running the books. After that, Redwood plans to issue about once a month — with full-year volume projected to exceed $4 billion. This year, the Mill Valley, Calif., REIT sold $1.9 billion of bonds via six transactions.

Redwood’s issuance plans are significant because it has been one of the few sources of non-agency mortgage-backed securities since the financial crisis. Indeed, of the 17 jumbo-mortgage offerings that have priced since the start of 2010, nine came from Redwood, according to Asset-Backed Alert’s ABS Database. The totals exclude re-Remic transactions.

While a number of big banks have taken steps toward reviving once-active mortgage-conduit programs, only Credit Suisse so far has managed to bring any deals to market. That’s partly because banks are able to tap low-cost deposits to fund their mortgage activities. Another limiting factor is ongoing uncertainty concerning the regulatory-capital implications of securitized mortgages.

In mapping an accelerated issuance routine, Redwood is responding to a combination of increasing investor demand for private-label mortgage bonds — which offer higher yields than agency paper — and a growing supply of collateral. Just as important, the firm is working more with suppliers outside of its home territory in the San Francisco Bay Area, tapping sources in Dallas, Denver, New York and elsewhere. The geographical diversity makes the deals an easier sell to rating agencies and investors alike.

Indeed, Redwood made a concerted effort to reduce the concentration of California mortgages in its securitizations after Moody’s and S&P raised the issue in rating separate deals in 2011 and 2012. Just before pricing a $293 million transaction on June 26, Redwood abruptly removed S&P from the rating lineup after the firm insisted on a higher level of protection for senior bondholders.

Last month, however, S&P adjusted its rating criteria in a way that de-emphasizes the geographic issues that undercut some of Redwood’s earlier deals. As a result, the issuer is thinking about hiring S&P to rate its next offering alongside Moody’s, Fitch and Kroll.

As for underwriters, look for Redwood to continue relying on Barclays for most of its deals, while occasionally tapping Credit Suisse and RBS as well.

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