March 18 (Bloomberg) -By Jody Shenn- Redwood Trust Inc., the biggest issuer of U.S. home-loan bonds without government backing last year, is ending its four-month absence from a market that’s all but evaporated as banks compete with debt investors for the extra yield offered by private-label mortgages.
Redwood, which specializes in jumbo mortgages, is planning a sale tied to 429 loans with outstanding balances of $347.3 million, Fitch Ratings said today in a presale report. The Mill Valley, California-based firm is including “fully-documented
loans to borrowers with strong credit profiles, low leverage and substantial liquid reserves,” the credit grader said.
The real-estate investment trust is returning to the bond market after saying last month it has been selling most of its mortgages without packaging them into securities. Banks have been buying or retaining home loans because it’s lucrative to do so with the Federal Reserve holding funding costs near zero, and because demand for other lending remains limited.
“We will always prefer securitization to selling whole loans for a number of reasons,” including “to ensure the long-term liquidity of our program,” Redwood President Brett Nicholas said on a Feb. 24 conference call for analysts and investors. Demand for top-rated securities has shown “clear signs of improvement” this year, he said.
Bundling loans into securities instead of selling them offers Redwood returns after issuance because it retains the riskiest slices. Redwood issued securities backed by about $5.6 billion of loans in 12 deals last year, according to data compiled by Bloomberg. Its last deal was in November.
Demand from banks for jumbo loans prompted JPMorgan Chase & Co. analysts this month to lower their forecast for 2014 issuance of non-agency, or private label, securities to $5 billion to $10 billion, from about $20 billion.
“The bank bid for loans is too strong relative to private label execution,” the New York-based analysts led by John Sim wrote in a March 7 report.
Here is the latest deal from Redwood, the Sequoia Mortgage Trust (SEMT) 2013-12x.
And here is the description for the A3 piece.
So, banks are bidding for high-quality, jumbo mortgages given The Fed’s cheap source of funding. Too bad the Mortgage Purchase Application Index remains in Death Valley. At least The Fed’s massive balance sheet expansion is helping banks buy jumbos!