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Cash-out refis stand out in latest Redwood RMBS pool

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Cash-out refis stand out in latest Redwood RMBS pool

The latest Redwood Trust Inc. prime jumbo RMBS deal is not only notable for the rapid speed with which the mortgage REIT is returning to the market. The underlying pool of mortgages, among other things, may be indicative of an increasing role for cash-out refinancings in an environment in which mortgage rates have moved higher.

Redwood Trust's Sequoia Residential Funding Inc. filed an asset-backed securitizer report on Form ABS-15G on Jan. 30, just 10 days after the $342.9 million Sequoia Mortgage Trust 2017-1 closed. Kroll Bond Rating Agency on Jan. 31 issued a presale report for the $347.8 million Sequoia Mortgage Trust 2017-2, a deal that the rating agency expects to settle Feb. 17.

August 2013 was the last time Redwood closed two Sequoia prime jumbo RMBS deals within a span of less than a month. The mortgage REIT completed transactions in successive months in mid-2016, but those closings happened approximately seven weeks apart.

The 2013 vintage represented the post-financial crisis peak for the Sequoia platform in terms of the pace of issuance. A total of 12 deals closed during that year, including two transactions during January.

Both 2017 pools are backed almost entirely by 30-year, fixed-rate mortgages. The average balance of the 486 loans in the 2017-2 pool of just more than $715,000, according to Kroll Bond Rating Agency, is nearly $30,000 less than that associated with the 2017-1 pool. The weighted average combined loan-to-value ratio increased slightly to 68.1% from 66.7%, and the weighted average borrower FICO score ticked down one point to a still-lofty 768.

Purchase mortgages account for 45.1% of the 2017-2 pool, up from 40.7% in the 2017-1 pool. Cash-out refis represent 24.3% of the 2017-2 pool, up from 20.7% in the previous transaction. It marks the highest relative concentration of cash-out refis in a post-financial crisis Sequoia prime jumbo RMBS pool, according to Kroll Bond Rating Agency statistics.

The rating agency said a weighted average combined LTV for the cash-out refis relative to the overall pool at just 60.2% "mitigates much of the risk associated with these potentially riskier mortgages." The weighted average combined LTVs of the purchase mortgages and non-cash-out refis in the pool are 74% and 65.7%, respectively.

"This is not an unusual distinction, but it does highlight the degree to which refinancing activity can affect the characteristics of RMBS pools," Kroll Bond Rating Agency said.

Quicken Loans Inc. was the largest originator of loans in the 2017-2 pool, with mortgages it produced accounting for 8.3% of the balance. The pool included loans originated by a total of 129 companies, and none of the other 128 are responsible for as much as 5% of the balance. Kroll Bond Rating Agency noted that a Redwood Trust affiliate purchased loans accounting for 6.4% of the balance from the Federal Home Loan Bank of Chicago, which had acquired them from various financial institutions.

"We have already seen cash-out refinances go from a minimal part of our business to a significant amount of our business," Graham Skidmore, vice president of marketing and business channel strategy at Quicken Loans, said during the December 2016 investor day of LendingTree Inc.

During the same event, LendingTree Chief Marketing Officer Sam Yount said cash-out refis had been "a gold mine for us" in terms of the response rates the company's advertising campaigns had achieved, but he tempered that statement by saying he expects interest in home equity products to grow to the extent mortgage rates continue to rise.

Black Knight Financial Services Inc. reported in its most recent Mortgage Monitor that the volume of cash-out refis increased in the third quarter of 2016 by 14% sequentially and 35% year over year, and those loans accounted for 43% of all refinancing activity during the period. It said that figure is likely to increase as rising interest rates cause other forms of refinancing to "dry up" such that they could account in 2017 for the majority of refinance originations for the first time in a calendar year since 2008. It, too, tempered its enthusiasm by cautioning that borrowers may seek to hold onto the current, low interest rates rather than engaging in a cash-out refi.

Plus, Black Knight added, "cash-out volumes are nowhere near those seen pre-recession; one should not expect 2005-2007 levels of refinance originations (despite having more candidates today) unless lending standards change."

Precrisis RMBS issuance volumes also remain far out of reach, but Redwood Trust's early activity to date in 2017 may be suggestive of an uptick from 2016's sluggishness.