By Shankar Ramakrishnan and Adam Tempkin
NEW YORK, March 21 (IFR) - The sway of better economics of whole-loan mortgage sales may still not be a strong enough reason to keep originators away from the US private-label securitisation market, which has suffered this year from a lack of issuance.
The proven ability of private label RMBS as an effective tool to augment investment portfolios is pushing some originators to revisit the market after lengthy pauses.
Last week, California REIT Redwood Trust, one of the most prolific issuers of post-crisis non-agency RMBS, announced a securitisation after almost four months of focusing largely on whole-loan sales, and a matter of weeks after saying it achieved better execution with whole-loan sales than securitisations.
The company's announcement of its first prime mortgage loan-backed deal of 2014 was immediately viewed as a sign that the economics of a securitisation trade have improved versus whole-loan sales.
At the end of last year, deals would have had to offer higher yields than earlier in the year, but Triple A rated tranches of mortgage securitisations have been tightening. One banker said the Triple As were now trading about 2.5bp back of bonds issued by agencies compared with about a 4.5bp gap in December.
The bank bid for jumbo whole loans became so strong that issuance estimates for non-agency RMBS have been revised downward. For example, JP Morgan slashed its 2014 volume forecast to USD5bn-USD10bn from an original prediction of USD20bn.
Against this backdrop, Redwood's return to the private-label market is even more noteworthy when put in the context of its own admission in an investor call in late February that it found whole-loan sales more cost-effective than private-label securitisations.
This came after the company cut its securitisation forays in the latter half of 2013 in favour of whole-loan packages. In the fourth quarter of 2013, Redwood completed only one USD325m RMBS but sold 16 whole-loan packages for USD648m and acquired USD659m in residential loans, according to its earnings report. This compared with nine RMBS in the first half of 2013.
But by announcing its first RMBS for the year - the USD341.92 Sequoia Mortgage Trust 2014-1 through BofA Merrill - bankers said Redwood showed that while originators would look at whole-loan sales for trading profit, they were unlikely to avoid the private-label market completely.
Redwood, in particular, wants to keep one foot in the private-label market because it can earn a return from the subordinate tranches it retains. Selling the mortgages outright would strip it of this option.
"It does not seem like a reversal of their course but that they are being smart by toggling between two products that meet different business objectives," said one banker, referring to Redwood's strategy of using both whole-loan sales and securitisation.
"It seems like at least in Redwood's case, they are willing to stick to selling whole-loans to the regional bank market that has greater appetite for hybrid loans while tapping the private-label securitisation market with their portfolio of fixed-rate loans and add to their holdings of subordinated bonds." (Reporting by Shankar Ramakrishnan and Adam Tempkin; Editing by Anil Mayre)