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Redwood's Role in Restoring the Private Mortgage Securitization

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					                       Redwood’s Role in Restoring
                the Private Mortgage Securitization Market
                             Presented by Jon Groesbeck
                                 ________________

         2012 Federal Home Loan Bank of Indianapolis Insurance Conference


May 24, 2012
Private Mortgage Financing Is Essential


   The $9.4 trillion U.S. residential first mortgage market is the largest private capital market in the world

   Fannie Mae and Freddie Mac (“GSEs”) guarantee about $4.3 trillion of mortgage securities and hold
    $1.4 trillion of mortgage loans and securities on their balance sheets

   Banks currently hold $1.9 trillion of mortgage loans and $1.4 trillion of MBS, and they have neither the
    capacity or desire to replace the GSE mortgage portfolios

   Pending GSE reform will likely substantially reduce the GSE’s involvement in the mortgage market
    and private securitization is the only viable option for match capital sources with mortgage borrowers




                                                                                                                  1
Securitization Remains a Viable Option

        Since 1990, the mortgage securitization rate has increased from 57% to 83%

        Currently, the government dominates the market

        Redwood’s Sequoia platform has completed five securitizations without government
         backing




                                                                                            2
Private Mortgage Securitization – What Worked?


   Private capital was allocated to borrowers without any government subsidies

   Prime jumbo mortgage securitization rate increased from 27% in 1990 to 51% in 2007

   RMBS investors received attractive yields

   Risk was allocated according to investor appetite

   Attractive mortgage rates for borrowers, especially for jumbo borrowers

   Mortgage product innovation




                                                                                         3
Private Mortgage Securitization – What Went Wrong?

   In some transactions, conflicted relationship between originators, servicers, and
    securitization sponsors

   Poor transparency in many transactions

   Mortgage product innovation introduced complexity

   Some borrowers misled lenders and some lenders mislead borrowers

   Weak reps and warrants in many deals, and investors faced challenges in enforcing claims
    (including that some originators were insolvent)

   Loss of confidence in rating agencies



                                                                                               4
Private Securitization


       With the burst of mortgage market, private securitization fell to zero in 2009 while
        government-backed securitization increased




                                                                                               5
It’s Not that Hard to Fix

 In summary to encourage investors back into the private mortgage

     ─ Restore investor confidence in borrower underwriting practices

     ─ Eliminate problematic conflicts among lenders, servicers, and issuers

     ─ Require issuers to retain “skin in the game”

     ─ Establish minimum servicing standards

     ─ Establish restraints on second mortgages

     ─ Finalize rules of the game under Dodd-Frank




                                                                               6
Redwood’s Role in Re-Starting Private Mortgage Securitization

   In late 2009, Redwood Trust began rebuilding its residential conduit after
    meeting with investors to determine what it would take to restore their interest

   In summary, investors wanted:
         ─    Strong borrower and collateral standards - full documents, low LTVs, income and
              employment verifications, high credit scores

         ─    An alignment of interests between the sponsor and the triple-A investors
         ─    Problematic conflicts between originator and servicer need to be addressed

         ─    Investor friendly structure – fewer tranches, increased collateral transparency, expanded
              due diligence and rating agency process

         ─    Improved rep and warranties with an improved enforcement mechanism - binding
              arbitration




                                                                                                          7
Redwood’s Role in Re-Starting Private Mortgage Securitization

In April 2010, Redwood’s Sequoia platform executed a $238 million non-government
supported residential mortgage securitization
        Strong borrower and collateral standards - full documents, low LTVs, income and
         employment verifications, high credit scores
        Redwood’s investment interests are strongly aligned with AAA investor
             Skin in the game - Redwood retained all the subordinate tranches and 5% of the senior
              tranche
        Investor friendly structure – only six tranches, with increased collateral
         transparency, an expanded due diligence and rating agency process, improved
         representation and warranties with the introduction of binding arbitration
        Securitization was six times oversubscribed by a variety of AAA investors (banks,
         insurance companies, institutional money managers) and allocated to 19 investors

Redwood’s Sequoia platform has since sponsored four other private securitizations
totaling $1.65 billion, including two in 2012


                                                                                                      8
Triple-A Driven Process

 Redwood’s Sequoia securitizations post 2009 have been primarily triple-A investor driven

 Our flow loan seller selection process is also investor driven

 Sequoia’s post 2009 triple-A securitizations have been well received by a wide variety of
  investors including banks, money managers, and both life and P&C insurance companies

 We actively look to our triple-A investors for feedback as it further develops its mortgage
  business

    We have recently been able to structure securitizations with both short and long cash flow
    tranches that may match better with insurance company needs, i.e. long term heath care
    accounts

 We are exploring alternative methods and structures of placing mortgages with insurance
  company type investors



                                                                                                  9
 Conclusion


 Redwood, through its Sequoia platform, has been in the forefront of restarting private mortgage
  securitization and our commitment has resulted in the first five non-government transactions
  since the freeze in 2008

 New Sequoia securitizations have provided triple-A investors with attractive yields and provided
  mortgage borrowers with equally attractive mortgage rates

 We expect other issuers to follow and build upon our success while continuing to foster
  renewed confidence among triple-A investors in the private jumbo mortgage securitization
  market, which is critical to GSE reform




                                                                                                     10
    Appendix*




                      Sequoia Mortgage Trust (SEMT) 2010-2012




*   All discussion of SEMT 2010-H1 is qualified by reference to the Prospectus Supplement dated April 23, 2010, as filed with the
    SEC. All discussion of SEMT 2011-1 is qualified by reference to the Prospectus Supplement dated February 25, 2011, as
    filed with the SEC. All discussion of SEMT 2011-2 is qualified by reference to the Prospectus Supplement dated September
    23, 2011, as filed with the SEC. All discussion of SEMT 2012-1 is qualified by reference to the Prospectus Supplement dated
    January 25, 2012, as filed with the SEC. All discussion of SEMT 2012-2 is qualified by reference to the Prospectus
    Supplement dated March 28, 2012, as filed with the SEC.



                                                                                                                                    11
    SEMT 2010-H1 Highlights*

1.      Prime jumbo loans – $238 million of 5/1 jumbo hybrid loans with a WA original CLTV of 60.42%
        and WA FICO of 768

2.      Simplified deal structure – 1 senior bond and 4 subordinate bonds, public deal rated by
        Moody’s

3.      Strong representations and warranties with enforcement provisions through binding arbitration

4.      Subordination floor of 75 bps (original balance) to minimize tail risk

5.      Delinquency test includes loan buy-outs and modifications for the 12 month period following
        occurrence

6.      Redwood initially retained 6.5% of the AAAs, the subordinate tranches, and the IO, and
        continues to hold the first 5% of the credit risk

*     All discussion of SEMT 2010-H1 is qualified by reference to the Prospectus Supplement dated April 23, 2010, as filed with the SEC.




                                                                                                                                           12
SEMT 2011-1 Highlights*

1.    Prime jumbo loans – $290 million of 30 year fixed rate and 10/1 Jumbo Hybrid loans with a
      WA original CLTV of 62.78% and WA FICO of 775

2.    Simplified deal structure – 1 senior bond and 5 subordinate bonds, public deal rated by Fitch

3.    Strong representations and warranties with enforcement provisions through binding arbitration

4.    Subordination floor of 125 bps (original balance) with a 5 year hard lock out

5.    Delinquency test includes loan buy-outs and modifications for the 12 month period following
      occurrence with no two times test

6.    Redwood initially retained the bottom 5% of subordinate tranches and the IO, and continues to
      hold the first 5% of the credit risk
*    All discussion of SEMT 2011-1 is qualified by reference to the Prospectus Supplement dated February 25, 2011, as filed with the SEC.



                                                                                                                                            13
SEMT 2011-2 Highlights*

1.   Prime jumbo loans – $375 million of 30 year fixed rate loans with a WA original CLTV of 64.20
     and WA FICO of 773

2.   Simplified deal structure – 1 senior bond and 5 subordinate bonds, public deal rated by Fitch

3.   Strong representations and warranties with enforcement provisions through binding arbitration

4.   Subordination floor of 85 bps (original balance) with a 5 year hard lock out

5.   Delinquency test includes loan buy-outs and modifications for the 12 month period following
     occurrence with no two times test

6.   Redwood retained the bottom 6.8% of the subordinate tranches, and continues to hold the first
     5% of the credit risk

*    All discussion of SEMT 2011-2 is qualified by reference to the Prospectus Supplement dated September 23, 2011, as filed with the SEC   .

                                                                                                                                                14
     SEMT 2012-1 Deal Summary*

1.     Prime jumbo loans – $220 million of 30 year fixed rate loans, $195 million 5 year, 7 year, 10
       year hybrid arms, and 15 year fixed loans with a WA original CLTV of 64.95% and WA FICO
       of 770
2.     Simplified deal structure – 2 senior bonds and 5 subordinate bonds, public deal rated by
       Fitch
3.     Strong representations and warranties with enforcement provisions through binding
       arbitration
4.     Subordination floor of 105 bps (original balance) with a 5 year hard lock out
5.     Delinquency test includes loan buy-outs and modifications for the 12 month period following
       occurrence with no two times test
6.     Redwood retained the bottom 8.4% of the subordinate tranches, and continues to hold the
       first 5% of the credit risk
*      All discussion of SEMT 2012-1 is qualified by reference to the Prospectus Supplement dated January 25, 2012, as filed with the SEC.




                                                                                                                                             15
SEMT 2012-2 Highlights*

1.     Prime jumbo loans – $328 million of fixed rate loans with a WA original CLTV of 65.98% and
       WA FICO of 769
2.     Simplified deal structure – 3 senior bonds and 5 subordinate bonds
3.     Strong representations and warranties with enforcement provisions through binding arbitration
4.     Subordination floor of 125 bps (original balance) with a 5 year hard lock out
5.     Delinquency test includes loan buy-outs and modifications for the 12 month period following
       occurrence with no two times test
6.     Redwood retained the bottom 5.6% of the subordinate tranches, and continues to hold the first
       5% of the credit risk

*    All discussion of SEMT 2012-2 is qualified by reference to the Prospectus Supplement dated March 28, 2012, as filed with the SEC.




                                                                                                                                         16
Redwood/Sequoia Securitizations Since April 2010


    Deal Characteristics                   SEMT 2010-H1              SEMT 2011-1               SEMT 2011-2         SEMT 2012-1        SEMT 2012-2

    Closing date                                    4/28/10                   3/1/11                     9/27/11         1/27/12           3/29/12
    Original collateral principal ($Mil.)            $237.8                   $295.4                      $375.2          $415.7            $327.9
    Number of loans                                     255                      303                         473             446               366
    Average loan balance ($000)                        $933                     $978                        $793            $932              $896
    Weighted average coupon                           4.80%                    5.05%                       4.88%           4.55%             4.60%
    Original combined average LTV                       60%                      63%                         64%             65%               66%
     Original CLTV > 80%                                 0%                       0%                          0%              0%                0%
    Weighted average FICO score                         768                      775                         773             770               769
     FICO < 721                                          6%                       5%                          8%              8%                7%
    Primary residence                                   97%                      94%                         95%             90%               92%
    California property location                        46%                      56%                         54%             49%               50%
    Weighted average debt to income                     27%                      29%                         28%             29%               30%
    Average monthly income ($K)                       $53.9                    $46.7                       $44.8           $56.1             $44.0
    AAA subordination level                           6.50%                    7.50%                      7.40%             8.25%            7.15%
    AAA coupon rate (1)                               3.75%                   4.125%                      3.90%             3.27%            3.50%
    Loan WAC > AAA coupon                             1.05%                   0.925%                      0.98%             1.28%            1.10%
    Rating agency                           Moody's, Fitch                     Fitch                     Fitch         Fitch, Kroll     Fitch, Kroll
    Lead underwriters                       Citi, JPMorgan              CS, JPM, Jeff.               CS, Wells     CS, Wells, JPM          Barclays
    Note: (1) For 2012-1, a blend of Class 1-A1 of $179.7M at 2.87% and Class 2-A1 of $201.7 at 3.47%.




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