New York | In this issue of The Institutional Risk Analyst, we speak with Chris Abate, CEO of Redwood Trust (NYSE:RWT). Mortgage finance professionals know RWT as one of the pioneers of non-agency, non “QM” or qualified residential mortgage production, an important market that exists outside of the heavily regulated world of Fannie Mae, Freddie Mac and Ginnie Mae. The non-QM mortgage market is also adjacent to the $2.9 trillion market for bank-owned 1-4 family mortgages and HELOCs held in portfolio, making RWT an important macro market bellwether for investors and regulators alike.
The IRA: You have seen an interesting 12 months at RWT. We started 2020 going gangbusters, then the money markets essentially melted down in mid-March. The Federal Open Market Committee responded with “shock and awe” and bought trillions of dollars in Treasury debt and agency MBS. Walk us through the past three quarters for you, both as an investor and as an issuer of private label MBS.
Abate: Interesting is one way to describe it! When the markets started to seize in March, we were in a very similar position to most in the industry. But soon the Fed stepped in and started buying Agency MBS en masse. You saw the bid for conforming loans skyrocket. Jumbos and other non-agency products were left unsupported. Ironically, the jumbo loans were higher quality and ultimately have fared better in terms of credit, but no one seemed to care at the time.
The IRA: Yes, we’ve often wondered why the Fed does not get the connection between prime non-QM loans and the bank portfolio market for residential jumbos. Kind of seems like an obvious area for Fed support in times of liquidity stress, but the economists don't seem to