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Rating Action:

Moody's assigns provisional ratings to Prime RMBS issued by Sequoia Mortgage Trust 2019-CH2

08 Jul 2019

New York, July 08, 2019 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to the classes of residential mortgage-backed securities (RMBS) issued by Sequoia Mortgage Trust ("SEMT") 2019-CH2, except for the interest-only classes. The certificates are backed by one pool of prime quality, first-lien mortgage loans.

SEMT 2019-CH2 is the eighth securitization that includes loans acquired by Redwood Residential Acquisition Corporation ("Redwood" or "Seller"), a subsidiary of Redwood Trust, Inc., under its expanded credit prime loan program called "Redwood Choice". Redwood's Choice program is a prime program with credit parameters outside of Redwood's traditional prime jumbo program, "Redwood Select". The Choice program expands the low end of Redwood's FICO range to 661 from 700, while increasing the high end of eligible loan-to-value ratios from 85% to 90%. The pool also includes loans with non-QM characteristics (34.3%), such as debt-to-income ratios up to 55.68%. Non-QM loans were acquired by Redwood under each of the Select and Choice programs.

The assets of the trust consist of fixed-rate fully amortizing loans and one interest only loan. The mortgage loans have an original term to maturity of 30 years except for two loans which have an original term to maturity of 20 years. The loans were sourced from multiple originators and acquired by Redwood.

All of the loans conform to the Seller's guidelines, except for loans originated by First Republic Bank with Redwood overlays, TIAA FSB (FKA EverBank), high balance agency conforming loans underwritten to GSE guidelines with Redwood overlays and loans purchased under reliance letter. One loan from loan Depot was purchased on a reliance letter and underwritten to loan Depot guidelines. The two out of eight loans from Guaranteed Rate were purchased based on reliance letter and underwritten to Guaranteed Rate Flex Jumbo guidelines. First Republic Bank originated loans conform with First Republic Bank's guidelines with Redwood overlays.

The transaction benefits from nearly 100% due diligence of data integrity, credit, property valuation, and compliance conducted by an independent third-party firm.

Nationstar Mortgage LLC will act as the master servicer of the loans in this transaction. Shellpoint Mortgage Servicing ("Shellpoint"), Quicken Loans Inc. ("Quicken Loans"), TIAA, FSB, First Republic Bank and HomeStreet Bank will be primary servicers on the deal.

The complete rating actions are as follows:

Issuer: Sequoia Mortgage Trust 2019-CH2

Cl. A-1, Assigned (P)Aaa (sf)

Cl. A-2, Assigned (P)Aaa (sf)

Cl. A-3, Assigned (P)Aaa (sf)

Cl. A-4, Assigned (P)Aaa (sf)

Cl. A-5, Assigned (P)Aaa (sf)

Cl. A-6, Assigned (P)Aaa (sf)

Cl. A-7, Assigned (P)Aaa (sf)

Cl. A-8, Assigned (P)Aaa (sf)

Cl. A-9, Assigned (P)Aaa (sf)

Cl. A-10, Assigned (P)Aaa (sf)

Cl. A-11, Assigned (P)Aaa (sf)

Cl. A-12, Assigned (P)Aaa (sf)

Cl. A-13, Assigned (P)Aaa (sf)

Cl. A-14, Assigned (P)Aaa (sf)

Cl. A-15, Assigned (P)Aaa (sf)

Cl. A-16, Assigned (P)Aaa (sf)

Cl. A-17, Assigned (P)Aaa (sf)

Cl. A-18, Assigned (P)Aaa (sf)

Cl. A-19, Assigned (P)Aa1 (sf)

Cl. A-20, Assigned (P)Aa1 (sf)

Cl. A-21, Assigned (P)Aa1 (sf)

Cl. A-22, Assigned (P)Aaa (sf)

Cl. A-23, Assigned (P)Aaa (sf)

Cl. A-24, Assigned (P)Aaa (sf)

Cl. B-1A, Assigned (P)Aa3 (sf)

Cl. B-1B, Assigned (P)Aa3 (sf)

Cl. B-2A, Assigned (P)A3 (sf)

Cl. B-2B, Assigned (P)A3 (sf)

Cl. B-3, Assigned (P)Baa3 (sf)

Cl. B-4, Assigned (P)B1 (sf)

RATINGS RATIONALE

Summary Credit Analysis

Moody's expected cumulative net loss on the aggregate pool is 0.85% in a base scenario and reaches 9.70% at a stress level consistent with Aaa (sf) ratings. The MILAN CE may be different from the credit enhancement that is consistent with a Aaa (sf) rating for a tranche, because the MILAN CE does not take into account the structural features of the transaction. We took this difference into account in our ratings of the senior classes. The MILAN CE may be different from the credit enhancement that is consistent with a Aaa rating for a tranche, because the MILAN CE does not take into account the structural features of the transaction. We took this difference into account in our ratings of the senior classes. Our loss estimates are based on a loan-by-loan assessment of the securitized collateral pool using Moody's Individual Loan Level Analysis (MILAN) model. Loan-level adjustments to the model included: adjustments to borrower probability of default for higher and lower borrower DTIs, borrowers with multiple mortgaged properties, self-employed borrowers, origination channels and at a pool level, for the default risk of HOA properties in super lien states. The adjustment to our Aaa stress loss above the model output also includes adjustments related to origination quality. The model combines loan-level characteristics with economic drivers to determine the probability of default for each loan, and hence for the portfolio as a whole. Severity is also calculated on a loan-level basis. The pool loss level is then adjusted for borrower, zip code, and MSA level concentrations.

Collateral Description

The SEMT 2019-CH2 transaction is a securitization of 479 first lien residential mortgage loans, with an aggregate unpaid principal balance of $353,349,238. There are 115 originators in this pool. 87.5% of the loans by balance are serviced by Shellpoint and 8.8% by Quicken Loans. The remaining originators contributed less than 5% of the principal balance of the loans in the pool. The loan-level third party due diligence review (TPR) encompassed credit underwriting, property value and regulatory compliance. In addition, Redwood has agreed to backstop the rep and warranty repurchase obligation of all originators other than First Republic Bank.

SEMT 2019-CH2 includes loans acquired by Redwood under its Choice program. Although the borrowers in SEMT 2019-CH2 are not the super prime borrowers included in traditional SEMT transactions from a FICO and LTV perspective, these borrowers are prime borrowers with a demonstrated ability to manage household finance. On average, borrowers in this pool have made a 23.8% down payment on a mortgage loan of $737,681. In addition, 67.3% of borrowers have more than 24 months of liquid cash reserves or enough money to pay the mortgage for two years should there be an interruption to the borrower's cash flow. The WA FICO is 746, which is lower than traditional SEMT transactions, which has averaged 771 in 2018 SEMT transactions. The lower WA FICO for SEMT 2019-CH2 may reflect recent mortgage lates (0x30x3, 1x30x12, 2x30x24) which are allowed under the Choice program, but not under Redwood's traditional product, Redwood Select (0x30x24). While the WA FICO may be lower for this transaction compared to previous transactions, we believe that the limited mortgage lates are less likely to demonstrate a history of financial mismanagement.

We also note that SEMT 2019-CH2 is the eighth SEMT Choice transaction to include a slightly lower number of non-QM loans (140) compared to SEMT 2019-CH1 (151) SEMT 2018-CH3 (155), SEMT 2018-CH2 (156) and SEMT 2018-CH1 (157) with the exception of SEMT 2018-CH4 (148).

Redwood's Choice program was launched by Redwood in April 2016. In contrast to Redwood's traditional program, Select, Redwood's Choice program allows for higher LTVs, lower FICOs, non-occupant co-borrowers, non-warrantable condos, limited loans with adverse credit events, among other loan attributes. Under both Select and Choice, Redwood also allows for loans with non-QM features, such as interest-only, DTIs greater than 43%, asset depletion, among other loan attributes.

However, we note that Redwood historically has been on average stronger than its peers as an aggregator of prime jumbo loans, including a limited number of non-QM loans in previous SEMT transactions. As of the June 2019 remittance report, there have been no losses on Redwood-aggregated transactions that we have rated recently, and delinquencies to date have also been very low. While in traditional SEMT transactions, we have factored this qualitative strength into our analysis, in SEMT 2019-CH2, we have a neutral assessment of the Choice Program until we are able to review a longer performance history of Choice mortgage loans.

Structural considerations

Similar to recent rated Sequoia transactions, in this transaction, Redwood is adding a feature prohibiting the servicer, or securities administrator, from advancing principal and interest to loans that are 120 days or more delinquent. These loans on which principal and interest advances are not made are called the Stop Advance Mortgage Loans ("SAML"). The balance of the SAML will be removed from the principal and interest distribution amounts calculations. We view the SAML concept as something that strengthens the integrity of senior and subordination relationships in the structure. Yet, in certain scenarios the SAML concept, as implemented in this transaction, can lead to a reduction in interest payment to certain tranches even when more subordinated tranches are outstanding. The senior/subordination relationship between tranches is strengthened as the removal of SAML in the calculation of the senior percentage amount, directs more principal to the senior bonds and less to the subordinate bonds. Further, this feature limits the amount of servicer advances that could increase the loss severity on the liquidated loans and preserves the subordination amount for the most senior bonds. On the other hand, this feature can cause a reduction in the interest distribution amount paid to the bonds; and if that were to happen such a reduction in interest payment is unlikely to be recovered. The final ratings on the bonds, which are expected loss ratings, take into consideration our expected losses on the collateral and the potential reduction in interest distributions to the bonds. Furthermore, the likelihood that in particular the subordinate tranches could potentially permanently lose some interest as a result of this feature was considered. As such, we incorporated some additional sensitivity runs in our cashflow analysis in which we increase the tranche losses due to potential interest shortfalls during the loan's liquidation period in order to reflect this feature and to assess the potential impact to the bonds.

We believe there is a low likelihood that the rated securities of SEMT 2019-CH2 will incur any losses from extraordinary expenses or indemnification payments owing to potential future lawsuits against key deal parties. First, the loans are prime quality and were originated under a regulatory environment that requires tighter controls for originations than pre-crisis, which reduces the likelihood that the loans have defects that could form the basis of a lawsuit. Second, Redwood (or a majority-owned affiliate of the sponsor), who will retain credit risk in accordance with the U.S. Risk Retention Rules and provides a back-stop to the representations and warranties of all the originators except for First Republic Bank, has a strong alignment of interest with investors, and is incentivized to actively manage the pool to optimize performance. Third, the transaction has reasonably well defined processes in place to identify loans with defects on an ongoing basis. In this transaction, an independent breach reviewer must review loans for breaches of representations and warranties when a loan becomes 120 days delinquent, which reduces the likelihood that parties will be sued for inaction.

Tail Risk & Senior 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. The transaction provides for a senior subordination floor of 1.90% ($6,713,635) of the closing pool balance, which mitigates tail risk by protecting the senior bonds from eroding credit enhancement over time.

Third-party Review and Reps & Warranties

Two TPR firms conducted a due diligence review of 100% of the mortgage loans in the pool. For 479 loans, the TPR firm conducted a review for credit, property valuation, compliance and data integrity ("full review") and limited review for 4 First Republic and PrimeLending loans. For the 4 loans, Redwood Trust elected to conduct a limited review, which did not include a TPR firm check for TRID compliance.

For the full review loans, the third party review found that the majority of reviewed loans were compliant with Redwood's underwriting guidelines and had no valuation or regulatory defects. Most of the loans that were not compliant with Redwood's underwriting guidelines had strong compensating factors. Additionally, the third party review didn't identify material compliance-related exceptions relating to the TILA-RESPA Integrated Disclosure (TRID) rule for the full review loans.

No TRID compliance reviews were performed on the three PrimeLending, and one First Republic Bank limited review loans. Therefore, there is a possibility that some of these loans could have unresolved TRID issues. We reviewed the initial compliance findings of loans for the First Republic Bank and PrimeLending loans where a full review was conducted. The due diligence report did not indicate any significant credit, valuation or compliance concerns. As a result, we did not increase our Aaa loss.

The property valuation review conducted by the TPR firm consisted of (i) a review of all of the appraisals for full review loans, checking for issues with the comparables selected in the appraisal and (ii) a value supported analysis for all loans. After a review of the TPR appraisal findings, we found the exceptions to be minor in nature and did not pose a material increase in the risk of loan loss. We note that there are 5 loans with final grade 'D' due to escrow holdback distribution amounts. The review for these loans was incomplete because the related appraisals were subject to the completion of renovation work or missing evidence of disbursement of escrow funds. In the event the escrow funds greater than 10% have not been disbursed within six months of the closing date, the seller shall repurchase the affected escrow holdback mortgage loan, on or before the date that is six months after the closing date at the applicable repurchase price. Given that the seller has the obligation to repurchase, we did not make an adjustment for these loans.

We have received the results of the inspection report or appraisal confirmation for all the mortgage loans secured by properties in the areas affected by FEMA disaster areas. The results indicate that the properties did not receive any material damage. SEMT 2019-CH2 includes a representation that the pool does not include properties with material damage that would adversely affect the value of the mortgaged property.

The originators and Redwood have provided unambiguous representations and warranties (R&Ws) including an unqualified fraud R&W. There is provision for binding arbitration in the event of dispute between investors and the R&W provider concerning R&W breaches.

Trustee & Master Servicer

The transaction trustee is Wilmington Trust, National Association. The paying agent and cash management functions will be performed by Citibank, N.A.(Citibank) and the custodian functions will be performed by Wells Fargo Bank, N.A., rather than the trustee. In addition, Nationstar Mortgage LLC, as Master Servicer, is responsible for servicer oversight, and termination of servicers and for the appointment of successor servicers. In addition, Nationstar Mortgage LLC is committed to act as successor if no other successor servicer can be found.

Servicing arrangement

There are five servicers in this pool: Shellpoint Mortgage Servicing (87.53%), Quicken Loans (8.77%), HomeStreet Bank (2.40%), First Republic Bank (0.74%) and TIAA, FSB (0.56%).

We consider the overall servicing arrangement for this pool to be adequate given the strong servicing arrangement of the servicers, as well as the presence of a strong master servicer to oversee the servicers. In this transaction, Nationstar Mortgage LLC (Nationstar) will act as the master servicer. The servicers are required to advance principal and interest on the mortgage loans. To the extent that the servicers are unable to do so, the master servicer will be obligated to make such advances. In the event that the master servicer, Nationstar (rated B2), is unable to make such advances, the securities administrator, Citibank (rated Aa3) will be obligated to do so.

Shellpoint Mortgage Servicing (servicer): Shellpoint has demonstrated adequate servicing ability as a primary servicer of prime residential mortgage loans. Shellpoint has the necessary processes, staff, technology and overall infrastructure in place to effectively service the transaction.

Nationstar Mortgage LLC (master servicer): Nationstar is the master servicer for the transaction and provides oversight of the servicers. We consider Nationstar's master servicing operation to be above average compared to its peers. Nationstar has strong reporting and remittance procedures and strong compliance and monitoring capabilities. The company's senior management team has on average more than 20 years of industry experience, which provides a solid base of knowledge and leadership. Nationstar's oversight encompasses loan administration, default administration, compliance, and cash management. Nationstar is an indirectly held, wholly owned subsidiary of Nationstar Mortgage Holdings Inc.

Factors that would lead to an upgrade or downgrade of the ratings:

Down

Levels of credit protection that are insufficient to protect investors against current expectations of loss could drive the ratings down. Losses could rise above Moody's original expectations as a result of a higher number of obligor defaults or deterioration in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market. Other reasons for worse-than-expected performance include poor servicing, error on the part of transaction parties, inadequate transaction governance and fraud.

Up

Levels of credit protection that are higher than necessary to protect investors against current expectations of loss could drive the ratings up. Losses could decline from Moody's original expectations as a result of a lower number of obligor defaults or appreciation in the value of the mortgaged property securing an obligor's promise of payment. Transaction performance also depends greatly on the US macro economy and housing market.

The principal methodology used in these ratings was "Moody's Approach to Rating US Prime RMBS" published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Credit Rating for Sequoia Mortgage Trust 2019-CH2 was assigned in accordance with Moody's existing Methodology entitled "Moody's Approach to Rating US Prime RMBS," dated November 15, 2018. Please note that on June 14, 2019, Moody's released a Request for Comment, in which it has requested market feedback on potential revisions to its Methodology for US Prime RMBS. If the revised Methodology is implemented as proposed, the Credit Rating on Sequoia Mortgage Trust 2019-CH2 may be negatively or positively affected. Please refer to Moody's Request for Comment, titled "Proposed Update to Moody's Approach to Rating US Prime RMBS", for further details regarding the implications of the proposed Methodology revisions on certain Credit Ratings.

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.

Significant weight was put on judgment taking into account the results of the modeling tools as well as the aggregate impact of the third-party review and the quality of the servicers and originators.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1183450.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Siva Ranjani Mettapalayam Pannir Selvam
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Sang Shin
VP-Sr Credit Officer/Manager
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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