New Issue RMBS Market Still Open

The RMBS market isn’t shut after all.

When Shellpoint pulled its sophomore offering of residential mortgage backed securities from the market at the end of October, it looked like RMBS issuance might be on hold for the rest of the year.
The pace of issuance had already slowed dramatically from the first half, in large part because the rapid rise in interest rates in June brought mortgage origination to a temporary halt, and it was unattractive to securitize loans with coupons that were no longer current.

Then Shellpoint, which is closely watched because it was founded by mortgage bond pioneer Lewis Ranieri and has big ambitions for its RMBS platform, withdrew its $250 million offering just a week before it was scheduled to close, citing the “substantial price disconnect” between the market for whole loans and new-issue RMBS. 

But on Nov. 7, executives from Redwood Trust, by far the most prolific issuers, expressed confidence that the real estate investment trust’s twelfth deal of 2013, would succeed because it was backed by “higher coupon mortgages [that] will be priced more favorably by investors.” And two weeks later, it did.

Redwood executives, who were speaking on a conference call following the release of third quarter earnings, said that current higher coupons on mortgages, have created a new, much longer, expectation for the duration of securities backed by lower coupon mortgages. “For instance an initial expectation of a five- to seven-year investment period may now be an eight- to 10-year investment period,” the executives said.  “Investors are demanding more yield [lower prices] to compensate for additional duration risk.”

[Citigroup, which was also in the market at the end of October with a $210 million RMBS deal called Series 2013-J1, also sold its entire deal, according to a person familiar with the transaction. The structure offered investors $189.5 million super senior, ‘AAA’ notes and $6.8 million ‘AAA’ –rated, class A-2 tranche. The deal, said the person familiar with the transaction, was not reduced in size, despite rumors to the contrary, and “there was abundant demand for all classes, including the AAAs.”] 

Redwood explained during its call that investors in triple-A rated RMBS will view securities backed by “more recently originated, higher coupon mortgages more favorably from a pricing standpoint.”

“This should help revive RMBS issuance,” said the issuer.

In the near-term, Redwood expects its loan sale distribution to be a combination of direct whole loan sales and securitizations. But the issuer said that “private securitization is our preferred source of loan distribution as it allows us to create attractive, ‘home-cooked’ credit and interest-only investments for our portfolio.” As opposed to whole loan sales, which generate a one-time fee, only.

Several other RMBS issuers provided color on the market during their third quarter earnings conference calls. Two Harbors Investment Corp. stressed that it has a good pipeline of originator partners to support its non-agency RMBS program, with 30 jumbo loan originators in various stages of approval that will potentially contribute scale.

The REIT also noted that big banks have been bidding much more competitively for jumbo residential mortgages.  During the third quarter, it said some banks were offering rates on 30-year, fixed-rate jumbo mortgages more than 25 basis points below GSE conforming rates. Jumbo loans are generally offered 25 basis points higher than conforming rates.

Two Harbors said it did not expect this trend to be long term and that “hopefully the market would revert to opportunities seen earlier in the year.”

As of Sept. 30, 2013, the company held prime jumbo residential mortgage loans with a carrying value of $119.6 million. It also had $16.2 million outstanding under short-term financing arrangements to fund the the collateral.

And PennyMac Mortgage Investment Trust disclosed during its Nov. 8 conference call that it only sold $170 million out of $550.5 million of RMBS bonds structured under its private-label securitization that was completed in the third quarter.

The securitization, PMT Loan Trust 2013-J1  was backed by collateral that was a combination of $393 million in unpaid principal balance of jumbo loans acquired in a bulk purchase transaction earlier in the third quarter and jumbo loans acquired through PMT’s correspondent business throughout the year.

“The subordinate and [interest only] securities are attractive long-term investments for PMT which provide spread income over time and also act as an economic hedge to other assets in PMT’s investment portfolio,” said David Spector, PMT’s president and chief operating officer. He said that the retention of the senior securities was viewed as an “opportunistic investment.”

The mortgage pool backing PMT 2013-J1 is comprised of 691 first-lien mortgage loans with an aggregate principal balance of $550,462,190.54 as of the cut-off date. The loans in the pool are all 30-year fully amortizing fixed-rate mortgages.