New York, November 30, 2012 -- Moody's Investors Service has assigned definitive ratings to five classes of Aaa (sf) residential mortgage-backed securities (RMBS) issued by Sequoia Mortgage Trust (SEMT) 2012-6. The certificates are backed by prime quality, first-lien 30-year and 20-year fixed-rate mortgage loans. The borrowers in this pool have high FICO scores, significant liquid cash reserves and equity in their properties.
The complete rating actions are as follows:
Issuer: Sequoia Mortgage Trust 2012-6
Cl. A-1, Assigned Aaa (sf) Cl. A-2, Assigned Aaa (sf) Cl. A-IO1, Assigned Aaa (sf) Cl. A-IO2, Assigned Aaa (sf) Cl. A-IO3, Assigned Aaa (sf) RATINGS RATIONALE Summary Credit Analysis and Rating Rationale
Moody's expected cumulative net loss on this pool is 0.35%. Aaa (sf) subordination for this transaction is 7.05%, which is consistent with Moody's collateral loss and structural analyses. In addition to using Mortgage Portfolio Analyzer to determine pool loss levels, Moody's performed a supplementary analysis of frequency and severity for prime loans in a stressed economy. Moody's determined the lifetime frequency of default for the worst performing jumbo loan vintage--the 2007 vintage--and augmented the 2007 vintage's actual default performance with its projection of future defaults by applying its RMBS surveillance methodology. Moody's severity analysis stressed home prices on a state-by-state, and in some cases an MSA basis, assuming another 33% decline on a national basis. Moody's further stressed the resulting default frequency to account for erosion of credit enhancement due to the shifting interest structure (further detailed below).
The SEMT 2012-6 transaction is a securitization of 358 first lien residential mortgage loans, with an aggregate unpaid principal balance of $301,462,461. There are 38 originators in the transaction including First Republic Bank , representing 12.5% of the outstanding principal balance of the mortgage loans, Fremont Bank (9.3%), PrimeLending (9.1%), Flagstar Bank (8.5%), United Shore Financial Services (8.1%), Cornerstone Mortgage Company (6.3%) and WJ Bradley (5.5%). The remaining 31 originators each account for less than 5% of the principal balance of the loans in the pool and provide reps and warranties to the transaction. Although the financial strength of most of the originators does not meet our criteria for Aaa (sf) ratings, this risk was mitigated by a third-party review of all of the loans contributed by the unrated originators. The loan-level review encompassed credit underwriting, property value and regulatory compliance. In addition, Redwood has agreed to backstop the rep and warranty repurchase obligation of the financially weaker originators.
The loans were all aggregated by Redwood Residential Acquisition Corporation (Redwood), which Moody's has assessed as an Above Average aggregator of prime jumbo residential mortgages. There have been no losses on Redwood-aggregated transactions that closed in 2010 and later, and delinquencies to date have also been very low. For 2010 to 2012 SEMT transactions, no loan has ever been more than 60 days delinquent.
Nine of the loans in the pool are located in counties for which FEMA has made a disaster declaration as a result of damage caused by Hurricane Sandy. Redwood hired real estate agents to perform external property inspections for these nine properties. There was no damage detected by the inspections. In addition, Redwood has made a representation that all loans in the pool are not damaged as of the closing date of the transaction. As a result, Redwood will be obligated to repurchase or substitute loans secured by damaged properties, or make indemnification payments to the trust for loans secured by properties that were damaged by the hurricane and were not removed prior to closing.
Third-party Review and Reps & Warranties
Third party due diligence underwriters verified the accuracy of the loan-level information the sponsor provided us. They also performed detailed credit, collateral, legal and regulatory compliance review on 94% of the loans (by number) in the pool. The review found that the majority of reviewed loans were compliant with Redwood's underwriting guidelines and had no valuation or regulatory defects. The loans that were not compliant with Redwood's underwriting guidelines had strong compensating factors.
Trustee & Master Servicer
The transaction trustee, Christiana Trust, has very limited experience in RMBS, which raises some operational concerns. These concerns are mitigated by the fact that the custodian, paying agent and cash management functions will be performed by Wells Fargo Bank, N.A. rather than the trustee. In addition, Wells Fargo, as Master Servicer, (rated SQ1-) is responsible for servicer oversight, and termination of servicers and for the appointment of successor servicers. In addition, Wells Fargo is committed to act as successor if no other successor servicer can be found.
Tail Risk & Subordination Floor
The transaction cash flows follow a shifting interest structure that allows subordinated bonds to receive principal payments under certain defined scenarios. Because a shifting interest structure allows subordinated bonds to pay down over time as the loan pool shrinks, senior bonds are exposed to increased performance volatility, known as tail risk. Moody's believes tail risk is greater in this pool than in the previous SEMT transactions because the loans' low interest rates will discourage voluntary prepayments. However, the transaction provides for a subordination floor of 1.25% of the closing pool balance, which mitigates tail risk by protecting the senior bonds from eroding credit enhancement over time.
We tested the sensitivity of the senior notes to increases in our Aaa stressed losses. Our current Aaa stressed loss level is 6.75% without taking into account the transaction structure. If our Aaa stressed loss level were 8.25%, all else being equal, the quantitative calculation would indicate a rating level of Aa2 (sf) for senior certificates, or two notches below the Aaa (sf) rating. If our Aaa stressed loss level were 10.75%, all else being equal, the quantitative calculation would indicate a rating of A1 (sf) for senior certificates, or four notches below the Aaa (sf) rating.
Parameter Sensitivities are not intended to measure how the rating of the security might migrate over time, rather they are designed to provide a quantitative calculation of how the initial rating might change if key input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. Parameter Sensitivities only reflect the ratings impact of each scenario from a quantitative/model-indicated standpoint. Qualitative factors are also taken into consideration in the ratings process, so the actual ratings that would be assigned in each case could vary from the information presented in the Parameter Sensitivity analysis.
Volatility Assumption Score
The V Score for this transaction is medium/high, which is equal to the medium/high score assigned for the US Prime Jumbo RMBS sector. However, there are differences between the drivers of the sector's V Score and this transaction's V Score.
The ratings and performance of US jumbo prime RMBS have been very volatile. Therefore, any transaction in this sector will have a 'high' V score pertaining to ratings and performance. On the other hand, there are many stabilizing factors for this transaction. The disclosure of loan level data for this new issuance is superior to historical transactions. Information pertaining to borrower cash reserves, time in current job and origination channel analysis was not only provided, but reviewed by an independent third party. Also, the structure for this RMBS incorporates a subordination floor of 1.25% and fewer number of tranches as compared to an average existing transaction in the sector. These factors add to the stability of ratings. Additionally, deal governance mechanisms are stronger than the sector average. Specifically, reps and warranties are much better and stronger than the sector average, and have a workable remedial process. While not all of the rep providers are financially strong entities, all of the loans originated by those rep providers have been reviewed by a third party for credit, valuation and regulatory compliance. V Scores are a relative assessment of the quality of available credit information and of the degree of uncertainty around various assumptions used in determining the rating. High variability in key assumptions could expose a rating to a greater likelihood of rating changes.
The V Score has been assigned consistent with the report "V Scores and Parameter Sensitivities in the US RMBS Sector," published in April 2009.
Rating Methodology: The principal methodology used in this rating was "Moody's Approach to Rating U.S. Residential Mortgage-Backed Securities," published in December 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
While assessing the ratings on this transaction, Moody's deviated from its published methodology as outlined below:
The output of Mortgage Portfolio Analyzer was used as one input for loss estimation. Alternative analytical inputs including a frequency and severity analysis based upon 2007 vintage performance, with significant weight put on expert judgment were also taken into account, including the aggregate impact of the third-party review and the quality of the servicers and originators.
In addition, Moody's publishes a weekly summary of structured finance credit ratings and methodologies, available to all registered users of our website, www.moodys.com/SFQuickCheck.
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For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.
Moody's received and took into account one or more third-party assessments on the due diligence performed regarding the underlying assets or financial instruments in this transaction and the assessments had a neutral impact on the rating.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF308598.
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Todd SwansonAsst Vice President - Analyst Structured Finance Group Moody'sInvestors Service, Inc.One Front Street Suite 1900 San Francisco, CA 94111 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Kruti Muni VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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