When the real estate market succumbed a few years ago into a deep recession it took the home loan sector with it. While many mortgage lenders failed spectacularly, others were kept from falling off the map by costly government bailouts or found a hopeful merger partner. This sudden inferno quickly chased the private - domestic and foreign - investor almost completely away from the secondary mortgage market where they had been buying securities to support the U.S. housing industry. Mortgage financing lately has been almost exclusively provided by government-affiliated agencies Fannie Mae, Freddie Mac and FHA. The behind the scenes mover has been the Fed, being a vital component to shore up the otherwise badly limping industry.
The Fed has now withdrawn from purchasing mortgage-backed bonds and is anxiously watching how the market will come along without its considerable influence. Its nearly unlimited buying power. It must like what it is now seeing.
Redwood Trust Inc. is taking a courageous first step into the still treacherous waters as it is planning to issue about $222 million in mortgage bonds backed by loans originated by Citigroup. This is the first deal this year where Washington is not playing any guaranteeing or insurance role. It is a blue-blood private label issue.
Redwood will package the bonds very carefully, and surprisingly transparently. They for sure are high quality; the minimum credit score is 702 and the maximum LTV, or loan-to-value, is 80%. It will give potential investors more detailed information about mortgage borrowers' income and assets than what was done before. It'll reveal how many have second mortgages and whether they are self-employed. Moreover, Redwood will have skin in the game by keeping both 5% of the offering and its riskiest portion on its own books. This pool has 255 loans with an average price of $933,000, which signifies jumbo mortgage territory.
Mortgage bond investors are still hurting from the whipping they took over the last several years in the housing market disintegration and their memories are likely long. They certainly will take a look at the offering and assess the integrity of the improved disclosures, but how many will be convinced to buy is another thing. If the yield is attractive enough there will be at least some takers. Pricing for the issue should take place in the coming days.
That a mortgage-backed private label offering is being presented at all is a positive move for the entire market. The current near-total absence of the private investor won't change overnight. This is a valuable first step, however, giving a small base from which to start building investor trust on the much-maligned product.