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Leading RMBS issuer off to 'a heck of a start' in 2018

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Leading RMBS issuer off to 'a heck of a start' in 2018

Redwood Trust Inc. continues to solidify its position as a leading residential mortgage securitizer.

But while the mortgage REIT said it priced five residential mortgage-backed securities transactions in the first two months of 2018, it continues to keep its options open for distributing the loans amassed by its residential mortgage banking conduit.

"We have had a heck of a start to the year," Redwood Trust President and CEO-designate Christopher Abate said during the company's March 6 investor day.

The rapid rate of securitization is notable given that Redwood Trust closed only two transactions during the fourth quarter of 2017. It was more than halfway into 2017 when the company completed its fifth securitization of that year.

Gar Kanouse, head of residential mortgage banking, added that RMBS issuance has proven to be a "very, very popular execution strategy" for Redwood Trust as demonstrated by its pricing of four deals on the traditional "Select" Sequoia Mortgage Trust prime jumbo program and a single so-called "Choice" transaction. The Choice program involves the acquisition of prime loans to borrowers with fully documented income and assets, but with credit parameters just outside those associated with the mortgage REIT's prime jumbo strategy, a market segment that Redwood Trust considers to be underserved.

"There's a lot of room for growth there," Kanouse said of Choice program production. He said the program has grown to represent about 35% of Redwood Trust's purchases. It has targeted acquisitions of Choice loans of approximately $2.5 billion for full year 2018, which would mark a near doubling of its 2017 volume of $1.3 billion. Those purchases would drive the expansion Redwood Trust expects to achieve in overall loan purchase volumes for the year. The company has targeted volume of between $7 billion and $8 billion in 2018, up from $5.7 billion in 2017.

The company's first securitization to include what Kroll Bond Rating Agency characterized as a "significant concentration" of Choice loans, the $307.6 million Sequoia Mortgage Trust 2017-CH1, closed in September 2017. A subsequent deal, the $320.3 million Sequoia Mortgage Trust 2017-CH2, closed in November 2017.

The fourth-quarter 2017 transaction was "received favorably by the market, attracting a diverse group of both new and existing investors," the company observed in its Redwood Review publication for the period. It added that future Choice transactions would likely be larger given the higher volume of purchases of the applicable type of loans. To that end, Sequoia Mortgage Trust 2018-CH1, which closed Feb. 28, was sized at $441.3 million, according to a Kroll Bond Rating Agency report.

Executives went through the ebbs and flows of Redwood Trust's issuance activity in the post-financial crisis years during the investor day, highlighting 2013 as "probably one of the best years" and 2016 as "one of the most challenging years."

Based on its year-to-date activity, "we think 2018 could be a very good issuance year," managing director Matt Tomiak said.

Tomiak emphasized, however, that Redwood Trust will continue to pursue the best available execution for the residential mortgage portfolio, whether that involves additional securitizations or whole-loan sales.

"Behind the scenes, we're constantly looking for new sources of liquidity," he said. "When you're us in the conduit, every morning you wake up and you need to buy loans. So that means ... every day you have to be selling and funding loans as well."

Tomiak said Redwood Trust's consistency of RMBS issuance, in both favorable and less-favorable markets, has been well-received by its investor base, a group that continues to expand and diversify. Pension funds and benefit plans have increasingly played a role, joining traditional investors in the banking, asset management and insurance sectors.

S&P Global Market Intelligence data show that U.S. insurance companies acquired 2017-vintage Sequoia Mortgage Trust certificates for an aggregate actual cost of approximately $928 million through the first nine months of 2017, for example, with subsidiaries of Principal Financial Group Inc. and Protective Life Corp. among the most active investors by dollar value of their purchases.

"The important thing for us to know is since 2010 the number of investors has increased significantly," Tomiak said, explaining that recent-vintage Sequoia Mortgage Trust deals have typically attracted upward of 25 investors per transaction. A total of 35 individual entities subscribed to the company's most recent transaction.

"Relying on any one investor," he said, "if they don't see relative value in the sector, if they're out of available funds — they're having disbursements that month [or] just don't feel like buying bonds that day ... you're going to have trouble maintaining liquidity and, therefore, being able to buy loans any given day."