New York, September 10, 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-CH3,
except for the interest-only classes. The certificates are
backed by one pool of prime quality, first-lien mortgage
SEMT 2019-CH3 is the ninth 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 (32.2%), such as
debt-to-income ratios greater than 43%. 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 three interest only loans. The mortgage loans have an
original term to maturity of 30 years except for two loans which have
an original term to maturity of 29 years and one loan which has 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 TIAA, FSB ("TIAA"; FKA EverBank) under
reliance letter. All TIAA loans were underwritten to TIAA's
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"),
TIAA, FSB, and HomeStreet Bank will be primary servicers on
The complete rating actions are as follows:
Issuer: Sequoia Mortgage Trust 2019-CH3
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)B2 (sf)
Summary Credit Analysis
Moody's expected cumulative net loss on the aggregate pool is 0.90%
in a base scenario and reaches 9.10% at a stress level consistent
with Aaa (sf) ratings. 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 and the
third party review results. 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
The SEMT 2019-CH3 transaction is a securitization of 472 first
lien residential mortgage loans, with an aggregate unpaid principal
balance of $360,458,793. There are 107 originators
in this pool. The largest originator by balance is Fairway Independent
Mortgage Corporation (8.61%). The remaining originators
contributed less than 5% of the principal balance of the loans
in the pool. There are three servicers in this pool: Shellpoint
Mortgage Servicing (96.2%), HomeStreet Bank (2.4%),
and TIAA, FSB (1.4%). 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
SEMT 2019-CH3 includes loans acquired by Redwood under its Choice
program. Although the borrowers in SEMT 2019-CH3 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 22.2% down payment on
a mortgage loan of $763,684. In addition, 60.6%
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 749, which is
lower than traditional SEMT transactions, which has averaged 771
in 2018 SEMT transactions. The lower WA FICO for SEMT 2019-CH3
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-CH3 is the ninth SEMT Choice transaction
to include a comparable number of non-QM loans (142) compared to
SEMT 2019-CH2 (140), 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
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-CH3, we have a neutral assessment
of the Choice Program until we are able to review a longer performance
history of Choice mortgage loans.
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-CH3 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, 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%
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
One TPR firm conducted a due diligence review of 100% of the mortgage
loans in the pool. For 459 loans, the TPR firm conducted
a review for credit, property valuation, compliance and data
integrity ("full review") and limited review for 13 PrimeLending loans.
For the 13 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.
Two loans were graded "C" by the third party review firm for
issues relating to closing disclosure. We consider such exceptions
to be minor and as such did not adjust our losses due to those exceptions.
No TRID compliance reviews were performed on the 13 PrimeLending 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 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 is one loan with final grade 'D' due to escrow holdback distribution
amounts. The review for this loans was incomplete because the related
appraisals was 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.
Original property values were verified predominantly using CDA valuation
or CU scores. CU scores were used to verify property values for
two GSE eligible loans and 17 non-conforming loans. We consider
the use of CU scores for non-conforming loans to be credit negative
due to (1) the lack of human intervention which increases the likelihood
of missing emerging risk trends, (2) the limited track record of
the software and limited transparency into the model and (3) GSE focus
on non-jumbo loans which may lower reliability on jumbo loan appraisals.
We increased our loss levels based on the pre-securitization third
party, for all non-conforming loans that had valuation verification
using only CU scores.
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-CH3 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.
There are three servicers in this pool: Shellpoint Mortgage Servicing
(96.2%), HomeStreet Bank (2.4%),
and TIAA, FSB (1.4%).
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
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:
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.
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
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-CH3 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-CH3 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
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.
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_1193356
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, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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
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
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
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
VP-Sr Credit Officer/Manager
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653