Q&A with Matthew Tomiak of Redwood Trust Inc.
By MBA Insights Staff
January 16, 2018
Matthew J. Tomiak is managing director with Redwood Trust Inc., Mill Valley, Calif., the largest U.S. issuer of jumbo private-label mortgage-backed securities. He helps manage Redwood's jumbo loan conduit and securitization programs and is a frequent speaker and author on structured finance and securitization in the mortgage industry.
Prior to joining Redwood, Tomiak served as a senior vice president with Bank of America, where he focused on mortgage liquidity and financing alternatives. He is Chair of the RMBS Issuer Committee for the Structured Finance Industry Group. He can be reached at Matthew.Tomiak@redwoodtrust.com.
MBA INSIGHTS: What is the outlook for the jumbo mortgage market next year?
MATTHEW TOMIAK, REDWOOD TRUST INC.: Overall, we have a positive view on opportunities for new jumbo originations in the coming year. If current market views on interest rates are accurate, rate and term refinances should decrease significantly. Despite this decrease, there is a very real potential that cash out refinances will increase due to years of significant home price appreciation. That, along with increased purchase loans, could fill the void left by the decline in rate and term refinances.
The overall job market has been strong, demographic and household formation trends have been positive for housing demand and mortgage credit is becoming more available. However, home purchases have been constrained by insufficient supply to meet the demand. As labor pools shift towards home building, this will hopefully create more supply and new purchase money loans to fill the gap left by decreased rate and term refinances.
INSIGHTS: Do you believe there is room for expansion of credit in the jumbo market?
TOMIAK: Redwood's expanded prime program, Redwood Choice, has significantly increased our ability to purchase great loans made to credit-worthy consumers. The program is still relatively new, and as we observe the performance of these expanded loans it will allow us to evaluate where we can prudently expand again.
As awareness of the Choice program grows, we believe we will see increased utilization of the program. After years of being told "no," many qualified consumers have given up. It's going to take time and significant investment in education from originators and realtors to get these people interested again. Fortunately for these consumers, a reduction in rate and term refinances will make the resources required to produce expanded credit jumbo loans much more available. There is plenty of room for expansion; it's just been a matter of focus. We believe that market conditions are now conducive to producing the requisite focus.
INSIGHTS: How is investor demand for purchasing jumbo mortgages? What opportunities do you see there?
TOMIAK: Investor demand for jumbo mortgages is incredibly strong. Banks still have a seemingly endless supply of capital to invest in mortgage loans. However, bank's demand in the jumbo world is really limited to super prime assets. The increased yield produced by expanded prime loans has created significant investor demand away from banks. Full-doc loans made to prime borrowers with attributes that put them just outside "super prime" have created a risk/reward investment opportunity that is attracting the interest of investors in both whole loans and RMBS backed by these loans. We think that demand for jumbo mortgages will only increase over time as people are able to observe the performance of these expanded prime loans.
INSIGHTS: After several years of increases, the MBA Mortgage Credit Availability Index has been declining or flat for nearly a year, with credit availability for jumbo loans falling the hardest. Why is this, and what can be done about it?
TOMIAK: Again, we think that this is mainly a matter of awareness and focus. The unprecedented years of continuous mortgage rate declines produced an environment where there was plenty of low hanging fruit in the form of rate/term refinances to super prime borrowers. As rate/term refinances wane, loan officers and mortgage companies will have to focus on something to fill the void. This increased focus will create the awareness needed to bring consumers back to the table. We see this as both a win for well-deserving potential home owners as well as the housing market as a whole.
Additionally, borrowers who fell just outside super prime have been offered higher interest rates that are disproportionate with the commensurate risk associated with their particular loan attributes. This has frustrated consumers and loan officers alike and resulted in few of these loans actually getting done. It's really been a "super prime" and "everyone else" market. New programs such as Redwood Choice allow loan originators to offer rates attractive to consumers that loan officers can actually sell.
INSIGHTS: In what ways is Redwood helping borrowers who might not qualify for a traditional jumbo loan?
TOMIAK: While Redwood is not a direct lender, we are creating liquidity and investment demand for the product. We have spent a lot of time over the past year helping educate originators on our expanded prime programs. We hope that this education translates to more loans to well-qualified borrowers and fewer Americans being left on the sidelines in the housing market. Thousands of high-income borrowers who would love to buy homes or refinance their current mortgages think they cannot do so because of misconceptions they have about their ability to qualify. We are hoping that our efforts as an end investor and purchaser of closed mortgage loans helps solve that problem.
INSIGHTS: Redwood recently began offering a program with a departure residence feature that allows a borrower to get a loan for a new home before selling their old home. What has been the reception so far?
TOMIAK: The reception has been extremely positive. It's a commonsense solution for a problem that impacts many people at some point in their life. Every year thousands of people relocate for work or other reasons. When moving with a family--especially on short notice--it's very common that people don't have time to list and sell their departure residence before purchasing a new home. This program allows loan originators to qualify consumers for a loan to purchase a new home with an interest rate commensurate with the fact that they will not always be carrying two mortgages.
INSIGHTS: How does Redwood minimize the potential risks to securitizers of providing non-QM attributes?
TOMIAK: The risks of securitizing non-QM loans are greatly misunderstood. In fact, what makes a loan non-QM is still greatly misunderstood by both originators and investors. While many market participants even now equate non-QM with subprime, Redwood's non-QM programs are prime programs that are far from subprime or other forms of risky lending. A loan categorized as non-QM does not necessarily mean the loan is of lesser credit quality than a QM loan. In fact, in many instances, a non-QM loan can be an excellent credit loan. Many factors that have nothing to do with credit can cause a loan to be non-QM, such as a wealthy borrower utilizing asset depletion or other income outside of Appendix Q to qualify.
Redwood minimizes risk in our non-QM programs by only purchasing full documentation loans where all eight underwriting factors established by the CFPB to prove ability-to-replay can be demonstrated and documented. In the case of prudent loans made to qualified borrowers, we believe the risk of a loan being QM versus non-QM is negligible. Pursuant to Dodd-Frank, Redwood holds the 5 percent statutory risk retention as a horizontal first loss piece. Redwood would be the first one to lose in the instance there was an issue with a non-QM loan, so we take this risk very seriously and have created internal controls and policies and procedures around ensuring all non-QM loans we purchase meet ability-to-repay requirements. Securitizing non-QM loans is not without risk, but we believe that with prudent underwriting guidelines and strict quality control procedures, these risks can be sufficiently mitigated.
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