Redwood Trust is broadening what kinds of prime jumbo mortgages it will accept and its appetite for non-qualified mortgages.
The Mill Valley, Calif., real estate investment trust will be acquiring interest-only and hybrid non-QM loans under its new "Redwood Choice" program, according to the Brett Nicholas, its president.
"We believe that capturing the entire prime universe, rather than just a subset of it, will enhance our competitive position in the market, allow us to create better-yielding investments, and, most importantly, allow us to leverage both the Redwood brand name and our existing resources," Nicholas said May 5 during a first-quarter earnings conference call.
Redwood will consider jumbos with debt-to-income ratios up to 49.9%, loan-to-value ratios up to 90% and FICO scores as low as 661, according to Redwood Managing Director Matt Tomiak.
However, under the Redwood loan purchase program a borrower can't have a combination of the highest DTI and LTV ratios and the lowest credit score due to the pricing for layered risk.
"The way the program works, you can't have all those attributes in the same loan," Tomiak said an interview.
In addition, the Consumer Financial Protection Bureau's mortgage rule caps the interest rate at 2.5% above the Fannie Mae, Freddie Mac standard interest rate. Redwood will not purchase high-priced mortgage loans, which prevents layered risk.
"You can control things that way. It keeps the loan in the prime category," Tomiak added.
Redwood also requires all non-QM loans to pass stringent ability to repay tests. It won't allow a 30-day late mortgage payment any more than once in the prior 12 months and no more than twice in the prior 24 months.
A borrower might have a low FICO score for reasons unrelated to their mortgage history, such as a disputed medical bill or missed utility payment, Tomiak said. "We are looking for people with a strong commitment to paying their mortgage" and "opening the credit box to ensure we allow all those people in."
He also noted that Redwood's default rate to date has been extremely low, which "makes you think we are missing qualified borrowers."
Redwood has 365 loan sellers and it acquired $1 billion in jumbo loans in the first quarter.
The REIT rolled out its Redwood Choice program to its sellers April 18 so it will take a while for its sellers to start originating these expanded credit QM and non-QM jumbo loans.
Martin Hughes, the chief executive of Redwood Trust, expects it will give his company a competitive advantage in the jumbo market.
"This should allow us to be more competitive against the big banks where their sweet spot is…super prime," Hughes said during the conference call.
Lending standards are starting to get a little more flexible in the jumbo market, according to Rick Sharga, chief marketing officer at Ten-X, based in Irvine, Calif.
"We are getting back to the time when somebody with a 660 FICO or 49% DTI ratio doesn't really look like a subprime borrower," Sharga said in an interview.
This far into the housing recovery, there is also a "little more creativity" in what people will look at in terms of risk and risk offsets.
"A lender might accept somebody with a high DTI ratio or a relatively low FICO, but they might require a larger down payment to mitigate the risks," Sharga said. "They are not layering on more risk."
However, "we not seeing much of this creativity outside of QM," he said, or the conforming loan space when it comes to the use of offsets to reduce risk.
