Sequoia Mortgage Trust

Transcription

1 Structured Finance RMBS Pre-Sale Report Sequoia Mortgage Trust Analytical Contacts: Kristymarie Cariello, Director (646) Jack Kahan, Managing Director (646)

2 Table of Contents Capital Structure and Assigned Ratings... 3 Transaction Overview... 3 Introduction... 3 Executive Summary... 4 Key Credit Considerations... 5 Recent Transaction Comparison Collateral Analysis Level Analysis and Adjustments Documentation KBRA Additional Adjustments Pool-Level Analysis and Adjustments Geographic Concentration Risk Large Risk Exposure to TRID-Related Expenses Other Considerations Structure Summary and Cash Flow Modeling Payment Structure Interest-Only Certificates Certificates Cash Flow Analysis Due Diligence Review Representations, Warranties and Enforcement Transaction Parties Master Servicer Nationstar Mortgage LLC Servicer Shellpoint Mortgage Servicing (SMS) KBRA Rating Process Scenario/Sensitivity Analysis Rating Surveillance Appendix A: Pool Stratifications Appendix B: Full Capital Structure Appendix C: Combinations Sequoia Mortgage Trust Page 2 September 27, 2018

3 Capital Structure and Assigned Ratings The ratings shown below have been published in conjunction with the closing of the SEMT transaction and the issuance of the related certificates. The capital structure shown below reflects the transaction s initial exchangeable and non-exchangeable certificates. The full capital structure is provided in Appendix B Full Capital Structure. This report does not constitute a recommendation to buy, hold, or sell securities. Class (1) A-6 A-15 A-18 A-21 A-IO1 A-IO6 A-IO7 A-IO15 A-IO16 A-IO18 A-IO19 A-IO21 A-IO22 B-1 B-2 B-3 B-4 B-5 A-IO-S R LT-R Initial Class ($) (2) $289,695,000 $77,252,000 $19,313,000 $45,445,000 $431,705,000 $289,695,000 $289,695,000 $77,252,000 $77,252,000 $19,313,000 $19,313,000 $45,445,000 $45,445,000 $7,043,000 $5,453,000 $5,454,000 $2,499,000 $2,272,513 $397,107,188 Capital Structure Class Type Class Coupon Description (3) Credit Enhancement KBRA Rating Super Senior / Sequential The lesser of (i) [ ]% and (ii) the Net WAC 15.00% Super Senior / Sequential The lesser of (i) [ ]% and (ii) the Net WAC 15.00% Super Senior / Sequential The lesser of (i) [ ]% and (ii) the Net WAC 15.00% Senior Support The lesser of (i) [ ]% and (ii) the Net WAC 5.00% IO / Senior The excess, if any, of the Net WAC over [ ]% IO / Senior IO / Senior IO / Senior IO / Senior IO / Senior IO / Senior IO / Senior IO / Senior The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [4.0000%] over (ii) the leaser of (a) the Net WAC and [3.5000%] The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% The excess, if any, of (i) the lesser of (a) the Net WAC and (b) [ ]% over (ii) the lesser of (a) the Net WAC and (b) [ ]% Subordinate Net WAC 3.45% AA (sf) Subordinate Net WAC 2.25% A (sf) Subordinate Net WAC 1.05% BBB (sf) Subordinate Net WAC 0.50% BB (sf) Subordinate Net WAC 0.00% NR Servicing Rights Strip The excess servicing strip NR Residual NR Residual NR Total $454,426,513 (1) All Classes shown above are Offered Notes except for the Classes B-5, A-IO-S, R and LT-R Notes. (2) Principal or Notional Amount, as applicable. (3) Reflects the per annum rate used in KBRA s analysis actual rates are TBD. The net weighted average coupon (Net WAC) is an annual rate equal to the weighted average of the net mortgage rates less certain transaction party fees, expenses, and as reduced by loan modifications, if any. Transaction Overview Introduction Sequoia Mortgage Trust (SEMT ) collateral pool contains loans designated as qualified mortgages (QM). For certain loans, the designation is QM even though the borrower s DTI may be above 43%, due to a temporary exemption afforded to GSE-eligible loans under the Ability-to-Repay (ATR) rules. The $454.4 million RMBS transaction is collateralized by a pool of 668 residential mortgages. This pre-sale report summarizes Kroll Bond Rating ncy, Inc. s (KBRA) analysis and is based on information regarding the underlying mortgage loans and the terms of the securitization as of September 27, Sequoia Mortgage Trust Page 3 September 27, 2018

4 Executive Summary For a comprehensive summary of SEMT mortgage pool metrics, please see the tables included in Appendix A: Pool Characteristics at the end of this report. Sequoia Mortgage Trust Page 4 September 27, 2018

5 Key Credit Considerations Experienced Aggregator/Investor RWT Holdings, Inc. (Redwood) has been an active contributor in the residential mortgage market for over a decade as a loan aggregator, issuer and investor in RMBS securitizations. Historically, Redwood has generally invested in and securitized high-quality jumbo prime mortgages which have performed well relative to the universe of non-agency securitizations. Redwood continues to diversify the loan sellers contributing to its SEMT transactions, with the loans in SEMT coming from 109 different originators While seller diversification increases exposure to originators with limited financial resources and unknown underwriting standards and processes, Redwood successfully manages its seller relationships, monitors collateral performance and acquires high quality loans. This is demonstrated in the performance of their Sequoia shelf, which has minimal delinquencies on the mortgages backing the previous SEMT transactions issued since Furthermore, Redwood s practice of owning a portion of the subordinate certificates helps provide an incentive for the conduit to maintain a focus on loan quality. However, there are no guarantees or requirements that Redwood will maintain its ownership for any specific time period and the amount of ownership may be limited. +/ + Strong Borrower and Collateral Quality SEMT consists of high-quality mortgage loans to prime credit borrowers with significant equity. The WA and C ratios provide a substantial margin of safety against potential home price declines, while the pool s scores, DTI ratios and income generally display strong borrower credit quality: SEMT Aggregate Non-ncy (78.3%) ncy-eligible (21.7%) WA < % 0.0% 0.0% WA O 68.1% 68.4% 67.0% O>80% 4.6% 5.9% 0.0% WA C 68.5% 68.6% 68.1% C>80% 4.9% 5.9% 1.2% WA DTI 33.3% 31.9% 38.3% DTI >43% 8.8% 0.0% 40.5% WA $307,677 $334,820 $209,679 $212,541 $232,360 $160,895 Purchase 68.1% 70.4% 59.8% Owner-Occupied 92.8% 91.8% 96.5% WA Reserves $342,731 $398,764 $140,430 WA KBRA FCF $10,922 $12,054 $6,835 + Sequoia Mortgage Trust Page 5 September 27, 2018

6 High, Asset Reserves and Residual On a weighted average basis, borrowers in SEMT contain can cover 100 months of P&I with their respective reserve levels and 72 months after adjusting for borrowers with multiple mortgaged properties. 1 The borrowers also exhibit comparable or higher residual income and reserves when measured against recent prime transactions which include both jumbo and agency-eligible loans. For additional color, please refer to the stratification below in which KBRA calculates median monthly residual income 2 for the borrowers in the pool. SEMT SEMT SEMT SEMT $12,054 $10,321 $12,324 $10,807 SEMT SEMT SEMT SEMT $6,835 $8,470 $4,849 $5,273 * not available for agency-eligible loans. Prime Jumbo KBRA Monthly Residual ncy-eligible KBRA Monthly Residual Prime Jumbo WA Liquid Reserves SEMT SEMT SEMT SEMT $398,764 $487,827 $359,535 $297,120 ncy-eligible WA Liquid Reserves SEMT SEMT SEMT SEMT $140,430 $144,388 $151,634 $108,741 + KBRA Free Cash Flow 100% Qualified Mortgage s All of the mortgages in SEMT fall under the scope of the Qualified Mortgage (QM)/Ability-to-Repay (ATR) rule and are designated by the originators/aggregator as QM (Safe Harbor) or QM (ncy/gse Eligible). Consequently, KBRA made no additional adjustments with respect to the risks associated with potential litigation-related losses. C (K)C Coupon DTI Purchase Owner-Occ <= 2, % 513,753 87, % 61.5% 64.6% 4.70% 48.01% % 100.0% 3.13% > 2,000 4, % 573, , % 70.2% 71.3% 4.68% 44.05% % 100.0% 4.66% > 4,000 6, % 602, , % 69.0% 68.8% 4.60% 38.69% % 98.2% 3.66% > 6,000 8, % 648, , % 70.7% 70.5% 4.64% 35.89% % 95.3% 4.08% > 8,000 10, % 704, , % 69.6% 69.3% 4.61% 32.54% % 96.0% 3.88% > 10,000 12, % 740, , % 72.2% 72.0% 4.67% 32.17% % 95.3% 4.38% > 12,000 14, % 770, , % 68.6% 68.4% 4.57% 28.86% % 88.8% 3.39% > 14,000 16, % 694, , % 65.8% 65.5% 4.65% 26.45% % 85.3% 3.09% > 16, % 880, , % 61.8% 61.6% 4.56% 21.09% % 77.5% 2.40% Total % 680, , % 68.5% 68.4% 4.62% 33.3% % 92.8% 3.69% The median KBRA Free Cash Flow is $7,406, with a minimum of $524. The WA Liquid Reserves are $342,731. The median income is 2.4x the U.S. meidan national income in 2015, according the the American Housing Survey. Level QM Designation C (K)C Coupon DTI Level QM: Safe Harbor % 713, , % 68.6% 68.3% 4.59% 31.9% % QM: Rebuttable Presumption 0 0.0% QM: ncy/gse Eligible % 583, , % 68.1% 68.8% 4.72% 38.3% % ncy QM (DTI <=43%) % 580, % 68.5% 68.4% 4.70% 32.5% % ncy QM (DTI >43%) % 587, % 67.4% 69.3% 4.73% 47.0% % + Total % 680, , % 68.5% 68.4% 4.62% 33.3% % 1 Assuming reserves are split evenly across a borrower s mortgaged properties. WA Reserve calculations exclude borrowers without reserves not provided by issuer for conforming loans. 2 KBRA calculates a borrower s residual income by reducing the total annual gross income of the borrower by federal and state tax obligation estimates (determined by the number of borrowers, occupancy status and the location of the property). KBRA divides this amount by twelve and subtracts the monthly payment on the subject mortgage and the borrower s other reported monthly debts to arrive at the borrower s residual income. Sequoia Mortgage Trust Page 6 September 27, 2018

7 120-Day Stop-Advance The subject securitization employs a structural feature in which the applicable servicer or servicing administrator (advance provider) will not provide advances of interest and principal on loans that are 120 days or more delinquent. This feature was first introduced with the SEMT issuance and is present in all subsequent SEMT transactions. During the period in which a loan is 120 days or more delinquent, the servicer will no longer advance interest. This will likely result in reduced loss severity relative to transactions with no stop advance feature, as the advancing party is generally reimbursed prior to payment distributions to the certificate holders. The stop-advance delinquent interest reduces both the Available Funds (amount received) as well as the Interest Distribution Amount (amount owed) and will not manifest itself in the certificate payment waterfall as an interest shortfall amount. As such, it cannot be recovered from available funds to that class or classes with a lower payment priority, as applicable. The feature only allows for funds to repay previous stop-advance delinquent interest amounts when there has been a resolution on the seriously delinquent loan and only up to the amount of interest recovered. In the case of a liquidation that results in a loss, any recovered proceeds will flow through the waterfall as Available Funds and will be distributed as unscheduled principal. KBRA s ratings process considered the likelihood and severity of missed timely interest payments in the subject transaction in a manner that is consistent with the trust s obligations to the certificate holders pursuant to the transaction s governing documents and our rating definitions. +/ Furthermore, the SEMT transaction includes the balances of the stop-advance loans in its structural framework, so that upon performance deterioration, the subordinate classes will become locked out from receiving principal sooner than a transaction without a similar stop-advance feature. Large s Relative to Pool Size High net worth borrowers often buy very expensive homes with so-called super-jumbo or mega-jumbo mortgages. While the terms and underwriting of such loans may generally be conservative, they can still present risk in the context of the loan s size relative to the pool size. -level models are derived from analyzing a large universe of loans, and such models work best when applied against pools with a large number of loans of relatively uniform size. For smaller pools with outsized loans, the risk associated with outlier loss events grow. Current Amount <= 250, % C (K)C Coupon DTI Purchase Owner-Occ > 250, , % 476, , % 68.1% 68.2% 4.61% 33.31% % 93.3% 3.71% > 500, , % 610, , % 69.1% 69.1% 4.65% 34.19% % 93.8% 3.87% > 750,000 1,000, % 858, , % 68.4% 68.2% 4.60% 32.46% % 91.1% 3.53% > 1,000,000 1,500, % 1,193, , % 67.3% 66.9% 4.56% 31.37% % 88.8% 3.43% > 1,500,000 2,000, % 1,752, , % 65.3% 65.2% 4.55% 32.18% % 100.0% 2.65% > 2,000, % Level Total % 680, , % 68.5% 68.4% 4.62% 33.3% % 92.8% 3.69% The maximum current loan amount equals $1,997,426, which represents 0.4 the pool. The five largest loans represent 2.1 the pool. KBRA addresses these risks by increasing final expected loss amounts in certain rating scenarios after considering the transaction size and certain loans size, C, and overall risk profile relative to KBRA s modeled expected losses. Sequoia Mortgage Trust Page 7 September 27, 2018

8 Geographic Diversity Non-conforming and agency high balance conforming mortgages are frequently originated in regions of the country with high home prices. As a result, the geographic concentration of pools of jumbo loans tends to be more meaningful, with significant exposure to assets located in the state of California. Geographic concentration, particularly at the CBSA level, can expose a transaction to larger impact from regional economic effects or natural disasters relative to more nationally diverse pools. While SEMT does exhibit some state concentration, the concentration among CBSAs is dispersed. The diversity among CBSAs is such that no geographic concentration adjustment was applied to the model s expected loss (EL). Please see below for the top 10 CBSAs and States, as a reference of geographic concentration. Top 10 CBSA C (K)C Coupon DTI Level Los Angeles, CA % 672, , % 67.1% 67.4% 4.68% 37.2% % Seattle, WA % 668, , % 68.0% 68.0% 4.65% 32.9% % San Francisco, CA % 767, , % 64.4% 64.8% 4.53% 34.7% % Dallas, TX % 646, , % 70.5% 70.4% 4.69% 32.4% % Denver, CO % 601, , % 72.0% 71.8% 4.63% 32.9% % San Diego, CA % 651, , % 74.9% 75.0% 4.69% 37.4% % San Jose, CA % 821, , % 57.6% 58.1% 4.55% 39.7% % New York, NY % 722, , % 62.3% 60.4% 4.25% 27.0% % Boston, MA % 670, , % 62.6% 62.6% 4.48% 28.9% % Phoenix, AZ % 654, , % 73.0% 72.8% 4.84% 28.1% % +/- Total % 688, , % 67.2% 67.2% 4.61% 34.1% % Top 10 States C (K)C Coupon DTI Level California % 700, , % 66.3% 66.5% 4.61% 36.5% % Washington % 657, , % 69.2% 69.1% 4.67% 32.8% % Texas % 646, , % 71.4% 71.2% 4.67% 33.2% % Colorado % 611, , % 72.8% 72.7% 4.63% 32.9% % New York % 722, , % 62.7% 60.7% 4.24% 27.4% % Massachusetts % 693, , % 63.6% 63.6% 4.45% 28.9% % Arizona % 642, , % 72.9% 72.7% 4.84% 28.3% % Florida % 696, , % 69.8% 69.6% 4.65% 33.9% % Illinois % 693, , % 61.4% 61.2% 4.66% 29.4% % Oregon % 686, , % 73.0% 72.9% 4.58% 30.3% % Total % 678, , % 67.9% 67.9% 4.62% 33.8% % 96.9% Third-Party Due Diligence Two independent third-party review (TPR) firms performed full loan file due diligence on 96.9 the pool, the remaining 3.1 the pool was not subjected to a third-party review. Instead the remaining 3.1% received a limited scope of review, which applies only to certain originators that meet RWT quality control and other standards. The limited review consists of a loan document inventory and data capture of approximately 100 data fields. In this pool all the limited scope loans were originated by First Republic and Primelending. For the population subject to the full scope of review, the results generally illustrated a sound underwriting and loan purchase platform, with exceptions or waivers generally granted based on adequate compensating factors. The regulatory compliance review identified one loan with a TRID related material exception; grade C, related to the inator Name on documents not matching the name in the NMLS database. The property valuation review identified one loan as having a material exception ( C Valuation Grade) and three loans had material valuation exceptions in relation to awaiting final appraisals upon completion of renovation work. These three loans received a final valuation loan grade D. All are included in the escrow holdback R&W. +/- Please see the Due Diligence Review section in this report for further details. Sequoia Mortgage Trust Page 8 September 27, 2018

9 Escrow holdback loans There are 6 loans (0.8% by pool balance) in SEMT that are subject to renovations scheduled to be completed after the closing date of this transaction. An escrow holdback is in place for these loans which allows the lender to fund the mortgage loan upfront and release funds for the repairs as the work is completed. As a percent of each loan UPB, the escrow holdback amounts are all less than 26 the original principal balance of such mortgage loan. The borrower is incentivized to complete the work as they pay debt service on the non-disbursed portion and the lender is incentivized to provide payment as failure to pay is a violation of the terms and cause for repurchase, as is non-completion within a specified time frame. All of the loans have an appraisal completed up front that is based on an as completed value, and all of the as completed appraisals received third-party valuation reviews (for example, desk reviews) which did not identify any material valuation variances. After completion of the project, all the loans receive a final inspection from the original appraiser. KBRA s analysis uses both the fully funded loan amount and the as completed appraised value. RRAC purchases loans with material escrow holdbacks in limited cases, and escrow holdbacks are not allowed for any items that would impact health or safety. RRAC provides for the repurchase of any loan where the escrow balance is greater than 15% at the end of six months from the SEMT closing date. TRID s; Minimal Compliance Risk 97.9 the loans in SEMT are subject to the TRID rule (TRID-Eligible s). In general, any residential, primary or secondary mortgage loan with an application date on or after October 3, 2015 is subject to TRID, which is a disclosure-based rule intended to protect borrowers by providing them with timely mortgage term disclosures, so they can better understand the loan terms and make an informed borrowing decision. TRID permits assignee liability for certain violations of disclosure requirements. KBRA applied a small increase to its loss expectations due to the uncertain regulatory environment surrounding the rule. KBRA s adjustment is based on numerous factors, including the number of TRID- Eligible loans in the pool, the low cap on statutory damages ($4,000), and KBRA s opinion of the low likelihood of successful affirmative claims. Industry Standard Representations and Warranties The transaction contains industry standard representations and warranties similar to those found in prior SEMT transactions. Please see Representations, Warranties, and Enforcement section in this report for details. Experienced Servicers and Master Servicer The loans will be serviced by SMS (87.3%), First Republic (8.6%) HomeStreet Bank (2.7%), Associated Bank (0.8%), TIAA, FSB (0.3%), and UBS Bank (0.2%), all of which are experienced mortgage loan servicers. Redwood Residential Acquisition Corporation will retain the servicing rights on the SMS subserviced loans. FRB will retain the servicing rights for the loans it originated. The master servicer, Nationstar Mortgage LLC. (Nationstar), has significant industry experience in that role, and its corporate credit quality provides it with the ability to fulfill its back up advancing obligations. Credit Risk Retention Rule In October 2014, the SEC and other federal agencies adopted the final Credit Risk Retention (RR) rules which became effective for RMBS issued on or after December 24, Unless an exemption to the rule is available, the rule requires a sponsor of any given securitization to comply with the rule, directly or through a majority-owned affiliate, by retaining at least 5 the credit risk for a period defined as the later of 5 years after close or when the collateral pool pays down to 25 its closing balance, and will end 7 years after closing. For SEMT , the Sponsor is relying on the qualified residential mortgages exemption, specified in the regulation, and is providing an R&W that all the assets in the securitization are qualified residential mortgages (QRMs). KBRA does not view this as a credit risk to the trust, as the compliance burden is on the Sponsor. +/ + + n/a Sequoia Mortgage Trust Page 9 September 27, 2018

10 Recent Transaction Comparison The chart below compares key collateral, structural and performance information for recent SEMT transactions rated by KBRA. All of these transactions consist primarily of 30-year fixed rate mortgages. To download the full transaction comparison, please click here: RMBS KCAT. Transaction Name SEMT SEMT SEMT Closing Date 10/18/2018 8/21/2018 6/20/2018 KBRA Rated (Y/N) Y Y Y Closing ance ($) 454,426, ,510, ,909,936 Average ($) 680, , ,064 Number of s WA WA C C > 80% WA inal WALA (mos) ARMs IO Full Doc WA DTI Primary Residence Purchase Cash-Out Refinance WA Gross Coupon WA Margin NA NA WA inal Term (mos) st Liens s with Subordinate Liens Conforming Geographical Concentration Largest State CA CA CA nd Largest State WA WA WA rd Largest state TX TX TX Top 3 States Largest CBSA Los Angeles, CA San Francisco, CA Seattle, WA nd Largest CBSA Seattle, WA Seattle, WA Los Angeles, CA rd Largest CBSA San Francisco, CA1-8.6 Los Angeles, CA San Francisco, CA1-7.5 Top 3 CBSA Top inators Largest inator United Shore Financial Services United Shore Financial Services United Shore Financial nd Largest inator Quicken s, Inc First Republic Bank HomeStreet rd Largest inator First Republic Bank Homestreet Bank Fairway Total Top inators Performance as of August 2018 Pool Factor NA mo CPR NA Life CPR NA Days Delinq. NA Days Delinq. NA Cumulative Loss / Credit Event Occurrence NA inal Support Levels Super Senior Senior / Senior Support B-1 (or 2nd Priority Tranche, as applicable) AA (sf) AA (sf) AA (sf) B-2 (or 3rd Priority Tranche, as applicable) A (sf) A (sf) A (sf) B-3 (or 4th Priority Tranche, as applicable) BBB (sf) BBB- (sf) BBB (sf) B-4 (or 5th Priority Tranche, as applicable) BB (sf) BB- (sf) BB (sf) B-5 (or 6th Priority Tranche, as applicable) NR NR NR KBRA '' Loss ('A' for Risk-Sharing Deals) Model GEO Adjustment GEO Adj % 0% 9% 4% + Other Adjustments Other Adj % 9% 18% 12% 1 San Francisco-Oakland-Hayward, CA; 2 New York-Newark-Jersey City, NY-NJ-PA; 3 Los Angeles-Long Beach-Anaheim, CA; 4 San Jose-Sunnyvale-Santa Clara, CA 5 Dallas-Fort Worth-Arlington, TX; 6 Boston-Cambridge-Newton, MA-NH; 7 Houston-The Woodlands-Sugar Land, TX; 8 Chicago-Naperville-Elgin, IL-IN-WI; 9 Washington-Arlington-Alexandria, DC-VA-MD-WV; 10 San Diego-Carlsbad, CA; 11 Seattle-Tacoma-Bellevue, WA; 12 Miami-Fort Lauderdale-West Palm Beach, FL; 13 Denver-Aurora-Lakewood, CO; 14 Minneapolis-St. Paul-Bloomington, MN-WI **The WA includes a 680 for foreign nationals without a score Sequoia Mortgage Trust Page 10 September 27, 2018

11 Collateral Analysis KBRA analyzed the mortgage pool consistent with its rating methodology and using its Residential Mortgage Default and Loss Model. The analysis incorporates quantitative loan-level as well as pool-level factors and qualitative analysis of the origination/aggregation and servicing procedures, third party due diligence results, and the RW&E framework to arrive at the following final expected losses: KBRA Rating Stress Expected Loss Summary Model Results GEO Conc Adj Large Ln Adj Other Adj Assigned Loss Levels KBRA PD LS EL Adj EL Adj EL Adj EL PD LS EL Rating Stress AA AA A A BBB BBB BB BB B B The collateral was analyzed through the related KBRA Residential Mortgage Default and Loss Model s Prime sub-model. In addition to general credit metrics, the expected losses assigned to SEMT incorporate loan- and pool-level adjustments to the model inputs and outputs that address risks related to the general topics below, which are highlighted further in this section. More detailed information on each is accessible by selecting the related hyperlink: Documentation The non-agency loans were qualified using traditional full income documentation (i.e. W-2, tax returns). The agency loans were documented with approval/acceptance through AUS. KBRA Additional Adjustments Adjustment for refreshed scores, as applicable. Geographic Concentration The top 3 CBSAs account for 33.1 the pool. Large Risk Nine loans (3.5%) have balances greater than or equal to $1.5 million ranging from approximately 0.4% to 0.6% each. Exposure to TRID-Related Expenses 97.9 the pool balance is subject to TRID. Other Considerations Operational Review of Redwood Trust. Due Diligence Review All of loans reviewed with acceptable results. Exceptions, where noted, were mainly waived underwriting conditions. Consistent with KBRA s Default and Loss Model Methodology, our expected losses as presented above incorporate assumptions meant to create baseline prepayment rates, which we believe, are consistent with the collateral pool having relatively lower refinance incentives. As more fully described in the Structure Summary and Cash Flow Modeling section below, additional sensitivity scenarios were analyzed to test the sufficiency of credit enhancement at issuance. -Level Analysis and Adjustments Documentation One important risk consideration for the mortgage pool is borrower documentation with respect to income, assets and employment. In KBRA s view, with consideration to the aggregator s UW guidelines and agency overlay, all of the borrowers either have income documentation that KBRA considered to be full documentation with documentation used during the underwriting process that meets the income and debt documentation framework established by Appendix Q to the ATR/QM rule or that were originated in accordance with the underwriting guidelines of Fannie Mae and Freddie Mac. Historical data shows that fully documented mortgages perform dramatically different from those with low or no documentation, likely due to the provision of information in support of a borrower s ability to undertake additional debt. A fully documented loan provides additional evidence, in comparison with a limited documentation loan, that the income and assets of the borrower have been verified, leading to more reliable DTI ratios. KBRA Additional Adjustments KBRA s analysis considers both original and refreshed scores (when applicable) when assessing a borrower s risk profile, acknowledging that updated credit scores typically decline after assuming substantial new mortgage debt, and thus, may understate a borrower s actual credit condition. As a result, KBRA uses refreshed credit scores in cases where the loan is seasoned more than six months or when a negative change in is significant enough to suggest that Sequoia Mortgage Trust Page 11 September 27, 2018

12 something other than the new mortgage loan has impacted the borrower s credit (KBRA Credit or K-). The WA loan age for SEMT is approximately 1.7 months, and 14 of the loans are seasoned over six months. Considering this, KBRA used a K- of 772 in its analysis of the SEMT pool, same as the WA original of 772. Pool-Level Analysis and Adjustments In addition to loan-level adjustments to model inputs and outputs, KBRA also assessed pool-level adjustments to the model results in order to capture the following risks in the text that follows: KBRA Rating Stress Model Results GEO Conc Adj Large Ln Adj Other Adj Assigned Loss Levels KBRA PD LS EL Adj EL Adj EL Adj EL PD LS EL Rating Stress AA AA A A BBB BBB BB BB B B (1) Expected loss results, inclusive of loan-level adjustments Expected Loss Summary Geographic Concentration Risk SEMT exhibits moderate geographic concentration relative to recent KBRA-rated non-agency RMBS transactions. Geographic concentration risk generally reflects the likelihood that a particular region of the country experiences an economic downturn incongruous with or more severe than the overall economy. RMBS pools benefit from regional diversification since it helps mitigate the impact of economic weaknesses (or natural disasters) in a given area. Given the risk of exposure to severe regional downturns, KBRA adjusts expected losses for pools with above average geographic concentration. KBRA uses a Herfindahl index as a metric to gauge concentration across metropolitan areas. Based on this metric KBRA increases losses at each rating category assuming a higher home price decline (HPD) scenario than implied by the related rating category, as described further in its methodology. SEMT State Pool California 36.4% Washington 12.7% Texas 9.5% Colorado 7.0% New York 3.8% Massachusetts 3.2% Arizona 2.5% Florida 2.5% Illinois 2.4% Oregon 2.0% Top % Top % SEMT (No Geo Conc Adj Applied) CBSA Name Pool Los Angeles-Long Beach-Anaheim, CA 13.6% Seattle-Tacoma-Bellevue, WA 10.9% San Francisco-Oakland-Hayward, CA 8.6% Dallas-Fort Worth-Arlington, TX 5.1% Denver-Aurora-Lakewood, CO 5.0% San Diego-Carlsbad, CA 4.3% San Jose-Sunnyvale-Santa Clara, CA 4.2% New York-Newark-Jersey City, NY-NJ-PA 4.0% Boston-Cambridge-Newton, MA-NH 2.9% Phoenix-Mesa-Scottsdale, AZ 2.4% Top % Top % Approximate Herfindahl Index Value 5.0% Large Risk Nine loans (3.5%) have balances greater than or equal to $1.5 million, ranging from approximately 0.4% to 0.6% each. When a pool contains a group of large loans with a low loan count, those loans can represent an unusually large percentage of the pool balance. This can present a risk that is not effectively addressed by the statistical approach employed in the model, whereby a large loan can represent an outsized loss in a smaller pool (i.e. an outlier event). To address this risk, KBRA increases its final expected loss amounts in certain rating categories in consideration of potential tail-risks in which unexpected poor performance from a small number of large, riskier, loans could have a negative impact on the performance of the rated RMBS. KBRA s general approach to analyzing this risk is to stress the expected loss on those loans in the pool that generate the largest model loss in dollar terms. While larger loans are Sequoia Mortgage Trust Page 12 September 27, 2018

13 typically more conservatively underwritten, it is our opinion that this stress is an important safeguard against idiosyncratic risks in small pools. Exposure to TRID-Related Expenses All but one of the mortgage loans in SEMT fall under the scope of the TRID rule. Currently there is no legal precedent serving as guidance for which TRID violations carry assignee liability and what re-disclosure or cure mechanisms may allowable. As a result, there is the possibility that RMBS investors may be subject to losses on a TRID- Eligible s assigned to the trust if a defaulted borrower successfully sues for damages under TRID. In addition, the scope requirements for testing for TRID compliance by independent TPR firms focus primarily on those requirements thought to be more material than others. This leaves open the potential that loans in the pool containing violations carrying assignee liability may go undiscovered. It is not uncommon to see TPR firms identify numerous minor TRID exceptions, though, unless stated elsewhere in this report, we believe the potential assignee liability is limited and quantifiable. KBRA increased its loss expectations by approximately 10 bps, given this uncertainty, the relatively low cap on statutory damage, and our opinion of the low likelihood of affirmative claims, reasonable attorney fees, and low successful claims likelihood. We note that the Sponsor has made R&Ws which would cause a remedy if a violation were to be determined. Other Considerations KBRA has performed an on-site operational assessment of Redwood Trust regarding its acquisition processes including seller approval, pre- and post-close QC, organizational structure, and servicer oversight. KBRA found the company s mortgage acquisitions operations to be appropriately structured and generally consistent with industry standards. The results of KBRA s review can be found below in the Aggregator section. Structure Summary and Cash Flow Modeling Payment Structure SEMT utilizes a senior/subordinate, shifting interest structure. Each class of certificates will accrue interest on its outstanding certificate principal balance or notional balance. The interest rate for each class of certificate is described in the table in Appendix B Full Capital Structure. Holders of the Initial Certificates may exchange all or part of each class for a proportionate interest in certain Certificates as described in Appendix C Combinations. The Stated Final Maturity Date is the distribution date in November The structure provides credit enhancement in the form of subordinate classes, as well as additional protection for the senior classes in the form of a specified lockout period during which the subordinate classes do not receive any portion of unscheduled principal payments received on the underlying mortgage loans. Scheduled principal is distributed pro rata. Following the initial lockout period, the distribution of unscheduled principal to certificate holders gradually shifts to a pro rata allocation among the related senior and the subordinate classes. However, such pro rata allocation is subject to the satisfaction of certain collateral performance tests to ensure that, for so long as mortgage delinquency or losses exceed certain thresholds, principal will not be distributed to the subordinate classes. In addition, if the senior subordination level falls below its initial subordination level, all principal will be redirected to the senior classes until its initial subordination level is restored. Sequoia Mortgage Trust Page 13 September 27, 2018

14 The priority of payments can be summarized as follows: 1. First, current interest and any previously accrued and unpaid interest is distributed pro rata to the Class A-6, A-15, A-18, A-21, A-IO1, A-IO6, A-IO7, A-IO15, A-IO16, A-IO18, A-IO19, A-IO21 and A-IO22 Certificates (collectively, the Initial Certificates). 2. Second, the Senior Principal Distribution Amount is allocated pro rata to: a. the Class A-6, A-18 and A-15 Certificates, in the aggregate, allocated sequentially in that order; however, on and after the Credit Support Depletion Date, principal will be allocated to the Class A-6, A- 18 and A-15 Certificates pro rata b. the Class A-21 Certificates 3. Third, current interest and any previously accrued and unpaid interest for such class and such class s pro rata share of the Subordinate Principal Distribution Amount is paid sequentially to the Class B-1, B-2, B-3, B-4 and B-5 certificates (the Subordinate Certificates), with both interest and principal being paid to one class before any payments are made to the next class. 4. Notwithstanding the above, on and after the Credit Support Depletion Date, the Senior Principal Distribution Amount will be distributed to the Class A-6, A-15, A-18 and A-21 Certificates, pro rata in accordance with their respective Class Principal Amounts. Allocation of Realized Losses If a Realized Loss occurs on the mortgage loans (including a servicing modification resulting in a reduction of the outstanding principal amount of such mortgage loan or a principal forbearance), then, on each Distribution Date, the principal portion of that Realized Loss will be allocated first, to reduce the Class Principal Amount of each class of Subordinate Certificates, in inverse order of priority, until the Class Principal Amount thereof has been reduced to zero (that is, such Realized Losses will be allocated to the Class B-5 Certificates while those certificates are outstanding, then to the Class B-4 Certificates while those certificates are outstanding, then to the Class B-3 Certificates while those certificates are still outstanding, and so forth), and, second, to the Senior Certificates (other than the Interest-only Certificates) on a pro rata basis in accordance with their respective Class Principal Amounts; provided, however, that while the Class A-21 Certificates are outstanding (without regard to any exchanges), Realized Losses that would otherwise reduce the Class Principal Amount of the Class A-6, Class A-15 and Class A-18 Certificates will first reduce the Class Principal Amount of the Class A-21 Certificates until the Class Principal Amount of the Class A-21 Certificates has been reduced to zero, and will then reduce the Class Principal Amount of the Class A-6, Class A-15 and Class A-18 Certificates on a pro rata basis in accordance with their respective Class Principal Amounts. The Senior Principal Distribution Amount for any distribution date is generally equal to the sum of (i) the Senior Percentage of all scheduled mortgage loan principal payments; (ii) the Senior Prepayment Percentage of all unscheduled principal collections; and (iii) for liquidated loans, the lesser of the amount of liquidation proceeds allocated to principal and the Senior Prepayment Percentage of the mortgage loan s outstanding principal balance at liquidation. The Subordinate Principal Distribution Amount for any distribution date is generally equal to the sum of (i) the Subordinate Percentage of all scheduled mortgage loan principal payments; (ii) the Subordinate Prepayment Percentage of all unscheduled principal collections; and (iii) for liquidated loans, the portion of liquidation proceeds allocable to principal (to the extent not distributed as part of the Senior Principal Distribution Amount). The Credit Support Depletion Date is the date on which the aggregate Class Principal Amount of the Subordinate Certificates has been reduced to zero. The Senior Percentage is equal to the aggregate outstanding principal balance of the Senior Principal Certificates on any distribution date (prior to any distributions of principal or allocation of realized losses) divided by the aggregate outstanding principal balance of the mortgage loans as of the immediately preceding distribution date. Sequoia Mortgage Trust Page 14 September 27, 2018

15 The Senior Prepayment Percentage for each distribution date is set forth below: Distribution Date Occurs in: Applicable Senior Prepayment Percentage November 2018 October % November 2023 October 2024 November 2024 October 2025 November 2025 October 2026 November 2026 October 2027 November 2027 and thereafter the Senior Percentage plus 70 the Subordinate Percentage the Senior Percentage plus 60 the Subordinate Percentage the Senior Percentage plus 40 the Subordinate Percentage the Senior Percentage plus 20 the Subordinate Percentage the Senior Percentage However, if the Step-Down Test is not satisfied on any distribution date, the Senior Prepayment Percentage will not be reduced (other than as a result of a reduction in the Senior Percentage). For any distribution date occurring on or after November 2023, if the Senior Percentage exceeds the initial Senior Percentage, the Senior Prepayment Percentage will be 100%. The Subordinate Percentage is equal to 100% minus the Senior Percentage. The Subordinate Prepayment Percentage is equal to 100% minus the Senior Prepayment Percentage on such distribution date. The Step-Down Test, consisting of a delinquency component and a loss component, must be satisfied in order for there to be a reduction of the Senior Prepayment Percentage. To satisfy the delinquency component, the outstanding principal balance of loans subject to a 60+ day delinquency (including loans in foreclosure, Real Estate Owned (REO), or bankruptcy status) or that have been subject to a servicing modification in the last 12 months averaged over the preceding six-month period may not exceed 50 the aggregate outstanding principal balance of the Subordinate Certificates. To satisfy the loss component, cumulative realized losses, along with any interest due that was written off on modified loans, may not exceed the percentages of the aggregate original subordinate certificate balance indicated in the following table: Distribution Date Occurs In: Cumulative Realized Losses as a the inal Aggregate Subordinate Classes Principal Amount November 2023 October % November 2024 October % November 2025 October % November 2026 October % November 2027 and thereafter 40% The Class Subordination Percentage for a class of Subordinate Certificates equals the outstanding principal balance of such class over the aggregate outstanding principal balance of all classes (excluding the Interest-Only Certificates and residual certificates) prior to any distributions of principal or allocations of realized losses on such date; provided that for purposes of calculating the numerator and denominator above, the Class Principal Amount of the class of Subordinate Certificates with the lowest payment priority shall be reduced by the aggregate of the Unpaid Principal s of any Stop Advance Mortgage s for such Distribution Date. The Applicable Credit Support Percentage for a class of Subordinate Certificates equals the sum of the Class Subordination Percentages for such class and all other classes having lower payment priorities: Class B % Class B % Class B % Class B % Class B % Sequoia Mortgage Trust Page 15 September 27, 2018

16 If the aggregate subordinate certificate balance falls below 1.25 the closing mortgage pool balance, all principal will be directed to the senior certificates. This subordination floor provides some protection against the senior certificates being supported by a small number of remaining loans. This is a condition which has been observed in many distressed RMBS where the expected optional redemption of the certificates did not occur, leaving a potentially long tail of minimal cash flow from a small number of loans. The transaction is subject to optional redemption when the pool balance falls below 10 the original balance. The Senior Principal Distribution Amount and the Subordinate Principal Distribution Amount are subject to the following structural features: 1. For any class of Subordinate Certificates (other than the class of Subordinate Certificates outstanding with the lowest numerical class designation), if the Applicable Credit Support Percentage for such class is less than the Applicable Credit Support Percentage for that class on the closing date, no distribution of principal will be made to such class or classes. Instead, the Subordinate Principal Distribution Amount will be allocated among the more senior classes of Subordinate Certificates entitled to receive principal, pro rata, based on their respective outstanding principal balances. 2. For any class of Subordinate Certificates (other than the class of Subordinate Certificates outstanding with the lowest numerical class designation), if the aggregate outstanding principal balance of such class and all classes with a lower payment priority is less than or equal to 1.25 the outstanding pool balance as of the closing date, then the portion of the Subordinate Principal Distribution Amount that would otherwise be distributed will instead be allocated pro rata among the classes of Subordinate Certificates senior in payment priority to such class. 3. Until the outstanding principal balance of the Senior Principal Certificates has been reduced to zero, if the Subordinate Percentage is less than 5.00%, the Senior Principal Distribution Amount for such distribution date will include all mortgage loan principal collections and the Subordinate Principal Distribution Amount will be zero. 4. Until the outstanding principal balance of the Senior Principal Certificates has been reduced to zero, if the aggregate Class Principal Amount of the Subordinate Certificates is less than or equal to 1.25 the aggregate outstanding pool balance as of the closing date, then the Senior Principal Distribution Amount for each Distribution Date will include all principal collections and the Subordinate Principal Distribution Amount will equal zero. Shellpoint Mortgage Servicing (SMS), FRB, HomeStreet Bank, Associated Bank, TIAA, UBS Bank, will have the primary responsibility for servicing the mortgage loans. RRAC will act as the Servicing Administrator for certain mortgage loans serviced by SMS. Nationstar Mortgage LLC. will act as the Master Servicer and will monitor each Servicer s performance under the servicing agreement. Each Servicer will receive a monthly fee based on the outstanding principal amount of the mortgage loans serviced by such servicer of 0.25% per annum. The Master Servicer, Securities Administrator, Custodian and Trustee will each receive a monthly fee based on the outstanding principal amount of all mortgage loans of %, %, % and % per annum, respectively. The Master Servicer, the Trustee, the Custodian and the Securities Administrator are also entitled to reimbursement of certain expenses from the trust prior to the distribution of any amounts to the certificate holders, subject to an aggregate annual cap of $300,000; provided that, in no event will the aggregate amount reimbursable to the Trustee exceed $125,000 annually. The servicers or the applicable servicing administrator are obligated to advance delinquent monthly debt service payments, subject to the determination that such amounts will be recoverable. If a servicer or servicing administrator fails to make a required advance, the master servicer is required to make such advance. The master servicer, servicer and the applicable servicing administrator will be reimbursed for such advances from future amounts received with respect to the related mortgage loans, and if non-recoverable from collections on the related mortgages, such advances will be recovered from the collections from other mortgage loans. Interest-Only Certificates In general, KBRA s credit ratings address the timely receipt of distributions of interest and, except in the case of the Class A-IO1, A-IO6, A-IO7, A-IO15, A-IO16, A-IO18, A-IO19, A-IO21, A-IO22, and A-IO-S Certificates (the Interest- Only Certificates), the ultimate receipt of principal on or before the rated final distribution date. KBRA s approach to Sequoia Mortgage Trust Page 16 September 27, 2018

17 rating interest-only certificates in RMBS transactions recognizes that a significant risk associated with such certificates is a faster-than-expected reduction in the notional balances due to either voluntary or involuntary prepayments or to the allocation of realized losses, to the extent that such events result in a decrease in the principal balances of the related class or classes of certificates used in calculating the notional balance of each class of interest-only certificates. Since interest-only certificates do not pay principal, KBRA s opinion is limited to addressing the timely payment of interest owed on the interest-only certificates after giving effect to distributions of principal and allocations of realized losses to the related certificates used to calculate the notional balance. The Interest-Only Certificates are entitled to receive interest pro rata with the Senior Certificates. Accordingly, in terms of the timely receipt of interest, KBRA believes that both the Senior Certificates and Interest-Only Certificates share the same risk profile and, as such, the Interest- Only Certificates should receive an rating. Certificates Holders of the Class A-6, A-15, A-18, A-21, A-IO6, A-IO7, A-IO15, A-IO16, A-IO18, A-IO19, A-IO21 and A-IO22 Initial Certificates may exchange all or part of each class of Initial Certificates for a proportionate interest in the Certificates listed in the following table, and only in the permitted combinations set forth in the table, and vice versa. Certificates may only be exchanged in the specified proportion that the original principal balances or notional amounts of such certificates bear to one another as shown in the table. Holders of Certificates will be the beneficial owners of an interest in the related Initial Certificates and will receive a proportionate share, in the aggregate, of the distributions on those certificates. Upon an exchange, the Certificates will be entitled to interest distributions at the applicable pass-through rate in the same priority as the Initial Certificates and, other than the Interest-Only Certificates, principal distributions on each class of exchangeable combination certificates, in the order of priority assigned to such certificates. Cash Flow Analysis KBRA s cash flow analysis considers the structural nuances present in SEMT , which include: Shifting interest payment priority Delinquency and Cumulative Loss triggers Subordinate Percentage, Applicable Credit Support Percentages Senior and Subordinate floors 120-day stop advance Pro-rata shifting interest payment priority, 120-day stop advance, Subordinate Percentage, Applicable Credit Support Percentages The KBRA residential mortgage default and loss model generates performance vectors reflecting mortgage pool default, loss severity, prepayment and delinquency at each rating category which were used in the cash flow analysis of the SEMT structure. Such vectors were used under various rating stress scenarios, showing that each bond class was able to withstand its applicable rating stress within an acceptable tolerance. KBRA s analysis is based on the framework provided by the transaction s governing documents, which incorporate, among other features, a 120-day stop advance feature that allows for the liabilities of the trust to receive interest that may be less than the optimal interest due. All sensitivity scenarios used in the respective rating stresses incorporated a delinquency curve that reflected such stop-advance feature to account for potentially reduced interest collections. In a shifting interest structure, subordinate tranches will receive principal payments while senior tranches are outstanding. Since subordinate bond balances, which serve as credit enhancement, are permitted to pay down, the initial credit enhancement percentage for a rated class in such structures needs to be somewhat greater than the expected loss percentage for that particular rating level. This leakage of principal to the subordinate classes occurs unless other structure features, typically collateral tests or credit enhancement floors re-allocate principal to more senior bonds. One mechanism in most RMBS 2.0 shifting interest structures that mitigates this leakage is the Applicable Credit Support Percentages, which lock out a subordinate class from receiving principal when its detachment point falls below its respective initial value, thereby stopping leakage to each subordinate class reverse sequentially. The SEMT Sequoia Mortgage Trust Page 17 September 27, 2018

18 structure enhances this feature as the Applicable Credit Support Percentages incorporate the balances of the stopadvance loans that have reached or exceed 120-day delinquency status. Since this will reduce the Subordinate Percentage for the entire balance of 120-day delinquent loans, the restriction of principal to more subordinate bonds will occur much earlier. Please see the table below, which compares the Subordinate Percentage in KBRA s stress under 2 scenarios, with and without the inclusion of the 120-day stop-advance. 7 Subordinate Percentage No Stop Advance With Stop Advance Examples of our cash flow stress curves, and their impact on class pay down, are detailed further in this report, with the following graphs displaying KBRA s cumulative loss, delinquency and bond balance projections for SEMT in our '' and BB scenarios. & BB Projected Cumulative Loss The loss rate accelerates around 5 years into the projection, a point at which house prices have bottomed and a pipeline of delinquencies have built up as prices have declined. This liquidation pipeline buildup is also apparent in the following chart, which tracks the 60+-delinquency bucket as a percentage of current collateral balance measured against the delinquency component of the Step-Down Test. Sequoia Mortgage Trust Page 18 September 27, 2018

19 60+ Day Delinquency Projection vs. Trigger Level The threshold for the Step-Down Test is 50 the subordinate class balance in any period, and the metric used in the test is actually the rolling average of the 60+ delinquency bucket (including loans in foreclosure, REO, bankruptcy and recent loan modifications) over the previous six months. This can be seen in the delinquency chart as a lag in the change-over point of the 60+ delinquency series from black (passing) to gold (failing) some months after the one month 60+ balance first breaches the trigger, with the trigger remaining in effect for a few months after the 60+ balance falls back below 50 the subordinate class balance. It should be noted that in the scenario the cumulative loss trigger also trips and prevents step-down even after the delinquency trigger passes near the end of the forecast. The ability to project the 60+ delinquency vector is a feature of the KBRA transition model that provides a more realistic cash flow forecast as the Step-Down Test can be calculated as a function of the expected defaults rather than using manual trigger overrides. Sequoia Mortgage Trust Page 19 September 27, 2018

20 Subordinate Bond Projection Scenario The previous chart illustrates projected declines in tranche balance (resulting from both principal pay down and loss, as applicable) over deal life when analyzing the transaction s structure using KBRA s modeled performance vectors in the stress scenario. Subordinate bond balances can be seen as a stack with each block representing their original sizes as a percentage of the starting collateral balance, with the factor of the senior tranche shown as a line graph (in blue) and cumulative losses depleting the subordination over time (in red). The subordinate bond balances will be affected post step-down based on the satisfaction of the Step-Down Test. Furthermore, principal distribution to each subordinate class will be re-allocated to classes of higher priority as a result of certain structural features and credit enhancement thresholds that must be satisfied: (1) If, on any distribution date, the Applicable Credit Support Percentage for a subordinate class (other than the B-1 class) is less than the initial value at closing, the principal that would otherwise be distributed to that tranche will instead be allocated pro rata to the subordinate classes of higher payment priority. (2) If, on any distribution date, the aggregate class balance of the Subordinate Certificates falls below an amount less than or equal to 1.25 the Stated Principal of the Mortgage s as of the Cut-off Date, all principal will be allocated to the Senior Certificates (the senior floor). (3) If, on any distribution date, the aggregate balance of a subordinate class (other than the B-1 class) and those below it in payment priority are less than or equal to 1.25 the Stated Principal of the Mortgage s as of the Cut-off Date, the principal that would otherwise be distributed to that tranche will instead be allocated pro rata to the subordinate classes of higher payment priority, with the excess, if any, being included as part of the Senior Principal Distribution Amount (the subordinate floor). If credit enhancement for the Senior Certificates (Subordinate Percentage) falls below 5.00%, all principal will be allocated to the Senior Certificates. This combination of structural features results in the subordinate classes becoming locked out from principal distributions at different points over time under our stress. Since the B-4 and B-5 tranches have been sized to be less than the 1.25% floor, they are locked out from receiving any principal. Thereafter, as the SEMT structure incorporates the balance of the stop-advance loans in the Subordinate and Applicable Credit Support Percentages, all of the subordinate classes become locked out from receiving principal as the seriously delinquent loan pipeline builds up and each tranche begins to fall below their respective closing levels. The B-3 becomes locked out in April 2020, the B-2 in October 2020 and the B-1 in April Note that due to the build-up of the serious delinquency pipeline in KBRA s stress, as the subordinates become locked out from receiving principal in a relatively short time period, their Sequoia Mortgage Trust Page 20 September 27, 2018

21 principal distribution amount will be included in the senior principal distribution amount. The performance deterioration allows the seniors to de-lever at a faster pace, as evidenced by a steeper decline in the senior factor (blue line). The subordinates remain locked out from receiving principal until May 2047, when the B-1 class (the only subordinate class outstanding) starts receiving principal after the seniors pay off in April Subordinate Bond Projection BB Scenario In the BB scenario, the B-4 and B-5 classes are again locked out from receiving principal from inception as they are below the 1.25% floor. The subordinate classes again become locked out from receiving principal as they fall below their respective initial detachment points but being this is a less dire scenario than the aforementioned stress, this occurs over a longer period of time. As each subordinate class becomes locked out, its share of principal will be directed pro-rata to more senior classes of subordinate certificates. This serves to de-lever the more senior subordinate classes at a faster pace as more junior subordinates become locked out, with the greatest benefit borne by the B-1 class. While the Cumulative Loss and Delinquency Tests never fail under the BB scenario, all of the subordinate classes except for the B-1 and B-2 do not receive principal upon step-down as the B-3 classis below its initial detachment points. The B-1 class was never locked out from receiving principal and pays off in November The B-2 then starts receiving principal, upon again reaching its respective detachment point, and continues to receive principal until it pays off also in March day Stop-Advance Feature The SEMT transaction incorporates a 120-day stop-advance feature in which the Servicers are required to advance delinquent monthly principal and interest payments, subject to the determination that such amounts are deemed recoverable and only for the first four months of delinquency. If the Servicers fail to make such required P&I advance, the Master Servicer will act as back up and make such advance. While this feature may result in earlier reductions of cash flows to the trust, the stop-advance feature should generally result in lower severities, and therefore, lower losses when compared to a transaction that does not contain this structural feature. This is because any amounts advanced are reimbursed to the respective Servicer from the liquidation proceeds prior to distributions to the certificate holders. The 120-day stop-advance feature also reduces the contractually owed interest amount below the optimal interest amount. While such delinquent interest reduces Available Funds flowing through the waterfall, such reductions are not classified as Interest Shortfalls under the governing documents, while the related loan remains more than 120 days delinquent. As such, the payment priority does not permit these interest reductions to be repaid from Available Funds (i.e., the portion of funds that would have been used to pay principal to the most junior class). Below are two scenarios which illustrate this mechanism when a 120-day delinquent loan becomes a stop-advance loan, and its delinquent interest is borne by the most junior class: Sequoia Mortgage Trust Page 21 September 27, 2018