Wednesday, March 31, 2010

Loans without backing are focus of Redwood offering

Original posted on the Wall Street Journal by James Hagerty and Nick Timiraos:

Redwood Trust Inc. is trying to reopen the market for securities backed by home-mortgage loans without any government backing, according to people familiar with the situation.

These people say the Mill Valley, Calif., mortgage-investment manager may launch as soon as next week an offering of such securities totaling at least $200 million, though the deal could be postponed if market conditions aren't propitious.

The transaction would be the first sale in more than two years of private-label securities backed by newly originated home mortgages. Other firms recently have issued private-label securities containing mortgages that were made in past years.

The market for private-label mortgage securities—those not backed by Fannie Mae, Freddie Mac or any other government-controlled entity—dried up more than two years ago when a surge in defaults killed investors' desire for such bonds.

If the Redwood transaction is successful, it could mark a small but important step toward healing a market that has been so devastated that it has become almost entirely dependent on government backing.

The Redwood securities would be backed by "jumbo" mortgages, or those too big to be backed by government agencies. Jumbo-lending volume has fallen sharply because banks have to hold those loans in their portfolios, and that has put pressure on the upper end of the housing market.

Redwood declined to comment.

At the peak of the housing boom in 2006, private-label mortgage securities accounted for 56% of the $2 trillion in mortgage securities sold to investors, according to Inside Mortgage Finance, an industry publication. But the private-label market has been nearly dead since the third quarter of 2007.

Even if the market's first offering is successful, it isn't likely to trigger an immediate rush of new issues. That is partly because lenders aren't originating large numbers of nongovernment-backed mortgages. The maximum size of "conforming" loans—those that can be sold to Fannie Mae or Freddie Mac—has risen to $729,750 in the priciest housing markets, up from $417,000 during the housing boom. As a result, most home buyers can get a conforming loan rather than a jumbo, which carry higher interest rates. Sales of higher-end homes in many markets have been sluggish, further reducing the supply of mortgages tied to the homes.

Investors could be attracted to deals right now because credit quality is strong, fueled by loan underwriting standards that are near the tightest levels in at least a decade. "You will see a couple of folks get out there and get these deals done in the next couple months," says Paul Bossidy, chief executive of Clayton Holdings LLC, who is working on a separate transaction.

The prospect of renewed interest from some private investors in mortgage bonds comes as the Federal Reserve on Wednesday is set to end its $1.25 trillion in purchases of mortgage-backed securities that has helped keep mortgage rates near record lows.

Meanwhile, the Association of Mortgage Investors, a trade group, on Tuesday issued a set of "guiding principles" to Congress and regulators with suggestions on how to revive private investment in mortgages. "Investors provide the capital that make securitization markets work," said Micah Green, a partner at the law firm of Patton Boggs LLP, who represents the association. But, he said, "the lessons learned over the last three years demand greater transparency and empowerment of investors for them to be comfortable buying mortgage products in the future."

Among other things, the association called for more information on individual loans that are put into pools of mortgages backing securities and more time for investors to review that data before making decisions.

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