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Redwood Trust closes deal on private mortgage securitization

By Renae Merle
Washington Post Staff Writer
Wednesday, April 28, 2010; 8:17 PM

A California firm completed the first private sector sale of a security backed by mortgages in nearly two years Wednesday, potentially the first step in reopening a market slammed shut by the housing crisis.

The $238 million deal sponsored by Redwood Trust included jumbo loans -- those too big to be backed by Fannie Mae and Freddie Mac, the mortgage financing companies, or insured by the Federal Housing Administration. The 255 loans had an average balance of $933,000 and were originated by Citigroup last year.

"This transaction has broken the ice in the private mortgage securitization market, which has been essentially frozen since 2008," Brett Nicholas, chief investment officer for Redwood Trust, said in a statement.

According to the statement, the buyers were "institutional investors," which could include money managers and pension funds.

Since the onset of the financial crisis, only mortgages guaranteed by Fannie and Freddie had been successfully securitized. In a program that ended in late March, the Federal Reserve bought $1.25 trillion in mortgage-backed securities to help shore up the housing market.

The pool of loans in the deal departs starkly from the mortgages that dominated the secondary market during the housing boom, said Tom Deutsch, executive director of the American Securitization Forum. During the boom, no-down payment mortgages were common and some loans didn't require borrowers to disclose income.

By comparison, in the loans repackaged in Wednesday's deal, borrowers made an average down payment of 45 percent and their mortgage payments comprised less than 30 percent of their income, Deutsch said.

"The core characteristics of these loans are some of the most pristine seen in securitization in potentially a decade," he said.

But that doesn't mean the secondary market is back, said Deutsch. There may be a few more deals this year, but it could take until 2011 to see significant activity, he said. "I think it signals that the market is starting to return, but clearly the market has not fully returned," he said.

If the Redwood securitization can be replicated, it could help thaw the market for jumbo loans, which now come with higher interest rates and usually require the borrower to make a larger down payment, at least 20 percent, analysts have said. Loans for less than about $730,000 in most parts of the country can be insured by the government or backed by Fannie Mae and Freddie Mac, which helps those borrowers secure lower interest rates and allows them to make smaller down payments.

"Restarting the secondary market for large jumbo mortgage will help borrowers by bringing about great availability of credit and better rates relative to smaller conforming mortgages," said Greg McBride, a senior financial analyst with Bankrate.com. But the market hasn't rebounded enough yet, he said. "One in a row is a nice start, but it's not a streak. This is going to have to build a little momentum before it trickles down to the borrower. This is a first step."

Redwood worked on the deal for nearly a year and parts of the it were given a triple A rating by Moody's Investors Service, according to the statement. But it did not receive universal acclaim.

In a note issued Wednesday, Standard & Poor's, another rating service, pointed to several risks associated with the securitization, including the large size of the loans. The default of one loan could have a greater impact on the entire pool, the note said.

Also, nearly all of the loans have an adjustable interest rate that could rise after five years, according to S&P. Many have a period in which the borrower is only paying the interest charged on the loan, instead of making payments towards the principal balance. "If mortgage rates rise, property values remain flat, and the extension of credit is limited, we believe borrowers may face difficulties refinancing," the note said.

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