There are only a handful of consistencies investors can rely on in the private-label market these days. Redwood Trust issuing at least one residential mortgage-backed securities deal a month is one.
The real estate investment trust has dominated in RMBS issuance. For the first time, Redwood issued two deals within the same month. And with each deal comes new, successful developments.
The sixth deal brings total RMBS issuance by Redwood alone to nearly $6 billion, half of what market experts were projecting for this year’s total amount.
The fact that Redwood has single-handedly led the RMBS market back to a path that may see it become a driving force once again should provide investors with a positive sign that it’s time to dip their toes back in the water.
So far this year, RMBS issuers have matched last year’s total. Industry researchers estimate that the total volume for 2013 could be between $15 and $20 billion, according to the American Securitization Forum.
“This recent uptick in private-label issuance can be attributed to a number of factors, including stabilizing home prices, industry efforts to revamp transaction terms and disclosure, better private-label execution for issuers and investors seeking higher-yielding assets in today’s low interest rate environment,” the trade advocacy group said.
However, it’s important to note that these issuance levels are mere specks when compared to pre-crisis levels. Additionally, private-label issuance levels remain a small fraction of the overall $1 trillion market for mortgage originations.
Indeed, mortgage investors are hesitant to revive the private-label RMBS market.
While policymakers and investors want an even playing field for the private sector, from a monetary standpoint there’s not enough private capital to take over the government-dominated $10 trillion market.
What’s holding the private sector back? Precisely those who are resistant to handing over their wallets: investors.
“The problem is the risk posed by private investment capital to investors. They aren’t convinced that the market has stabilized enough or is sustainable,” said Martin Hughes, CEO of Redwood Trust.
Even so, the deals being priced by Redwood are extremely cushioned, which doesn’t pose any significant amount of risk to the investor — the bigger the risk the more attractive the slice of the deal pie.
“I can guarantee you that if we had another financial crisis, Redwood would not lose a single dime on any of its deals because of the cushion they’ve put in place,” claimed James Millstein, chairman and CEO of financial services advisers Millstein & Co.
Millstein is credited with the restructuring of AIG in the wake of the financial crisis.
Regardless, it’s the same song, different dance for the market — Congress needs to make a final decision about the role of Fannie Mae and Freddie Mac.
“I believe that private capital wants to come back and will come back, if the government would only step out of the way and let it,” said Rep. Scott Garrett, R-N.J.
While the private capital takeover in the market may never reach the peak period of $3 trillion like it did back in the heyday of 2007 in mortgage-backed securities issuance, securitization is in a class of its own.
So there’s still market appeal for the private sector.
“The securitization market creation was a proper matching of assets and liabilities in the system,” Millstein said. “There’s something fundamentally good about the business because it diversifies credit risk.”
Thus, Redwood has provided an answer to investors and those who still question if mortgage investors want more skin in the game. Yes.
After all, the trust can claim a number of points of pride. Not only is the firm one of only a handful of issuers in the private-label market, but also its classes from previous deals have no realized losses or short falls, indicating the RMBS bonds are successful.
For instance, the second deal of last year has delivered primarily due to senior classes receiving 100% of unscheduled principal, while subordinate classes have paid down through “pro-rata payments” of scheduled principal, according to Kroll Bond Ratings.
“Performance of SEMT 2012-2 has remained pristine as no loan has missed any payments since deal close. Conditional prepayment rates (CPRs) have remained high in the low rate environment,” the credit ratings agency said.
As Redwood keeps meeting its monthly issuance goal, Kroll continues to commend the REIT as an experienced aggregator, issuer and investor in RMBS securitizations.
“Historically, Redwood has generally invested in and securitized high-quality jumbo prime mortgages, which have performed well relative to the universe of nonagency securitizations,” Kroll analysts concluded.
