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Sponsors navigate RMBS market characterized by 'feast or famine'


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Sponsors navigate RMBS market characterized by 'feast or famine'

Marketconditions have caused RedwoodTrust Inc. to put off the issuance of a new prime jumbo RMBS dealthrough its Sequoia Mortgage Trust platform so far in 2016 even as one of itspeers has already completed two transactions of the kind.

Themortgage REIT suggested May 5 that its absence from the new-issues market maycome to an end in the coming months, but 2016 already stands as the first time since2009 in which it did not sponsor a Sequoia deal during the first four months ofa year. It had already closed two securitizations by this point in 2015,something Two Harbors InvestmentCorp. has done in 2016 through its Agate Bay Mortgage Trustplatform.

"Overthe past five years, the issuance market for securitization has fluctuatedbetween feast or famine, and unfortunately, it is currently in the latterstate," Redwood Trust said in its quarterly report released May 5.

Themortgage REIT cited a lack of liquidity as the RMBS market's "primaryobstacle" as traditional issuers such as major banks remain on thesidelines where they are joined by "many" investors in AAA-ratedcertificates.

"Thiscondition has kept credit spreads both wide and volatile, which pressuressecuritization economics," Redwood Trust said. It responded to marketconditions by pursuing whole-loan sales, which have been characterized byfavorable economics.

RedwoodTrust said its jumbo residential loan purchase commitments amounted to $1billion during the first quarter, down slightly from $1.1 billion in the fourthquarter of 2015. Its pipeline of jumbo loans identified for purchase totaled$1.1 billion as of March 31.

Jumboloan sale margins, which the mortgage REIT defines as net interestincome plus income from mortgage banking activities divided by loan purchasecommitments, improved markedly to 147 basis points in the first quarter from 74basis points in the fourth quarter of 2015 and 59 basis points for full year2015, a level that it said was "significantly above our long-termexpectations."

RedwoodTrust said its $1.3 billion of residential loan sales during the first quarterincluded approximately $900 million of jumbo loans sold to third parties, andit transferred approximately $700 million of jumbo loans to its captiveinsurance unit that maintainsmembership in the Federal Home Loan Bank of Chicago.

RedwoodTrust's residential mortgage banking segment has transitioned away fromtransacting in conforming loan products and is now solely focused on jumbo loaninitiatives.

Thelast Sequoia deal, the $337.1 million Sequoia Mortgage Trust 2015-4, closed inNovember 2015. According to data logged by Kroll Bond Rating Agency, thetransaction was the platform's 29th post-financial crisis new-issue deal,though 18 of those transactions occurred in 2012 and 2013. Thefirst in that line of deals, Sequoia Mortgage Trust 2010-H1, closed April 28,2010, marked the latest the mortgage REIT had brought a new-issue transactionto market in a given year during the period from 2010 through 2015.

TwoHarbors Chief Investment Officer William Roth offered upbeat remarks about hiscompany's experience in sponsoring new-issue prime jumbo RMBS during the firstquarter in transactions with combined unpaid principal balance of approximately$628.3 million.

"OurAgate Bay brand continues to gain traction with investors, and we are seeingboth repeat and new investors in our program," he said during a May 5conference call, according to a transcript of his remarks.

TwoHarbors retained the "attractive credit pieces" of the two2016-vintage Agate Bay deals while "selling senior AAA bonds," Rothadded. It also opted to sell some of the AAA-rated bonds it had retained fromearlier Agate Bay transactions.

"Withimprovement in AAA spreads late in the quarter, we sold some of these to meetmarket demand," he said. "Spreads continued to improve in April,allowing us to continue this trend."

Atthe same time, Roth reported that the combination of the AAA-rated bond salesand "much lower lock volumes" resulted in Two Harbors reducing itslevel of capital allocation to its jumbo conduit.

"Thecombination of regulatory constraints like TRID (the Consumer FinancialProtection Bureau's TILA-RESPA Integrated Documentation ) and competitive pricing from thebig banks have led to a challenging market environment for aggregating loansfor securitization," he said.

Securitizationsponsors such as Two Harbors and Redwood Trust have faced — and overcome —their share of challenges in a post-crisis environment where deal volume hasgenerally been characterized by fits and starts.

RedwoodTrust hopes to sponsor a securitization "in the next few months," andthe mortgage REIT said it is looking forward to the opportunity to invest inthe subordinated tranches of that deal. CEO Martin Hughesclarified during a May 5 call that the transaction would probably occur in thesecond quarter "to kind of keep the wheels turning" from theperspective of generating "some investments" for the mortgage REIT'sportfolio.

"Wecontinue to believe that over time [private-label securitization] is veryefficient and necessary for mortgage financing, especially for prime jumboloans," Redwood Trust said in the quarterly report. "Our Sequoiasecuritization program is the market leader, and we continue to actively workwith [AAA] investors to introduce new enhancements."