April 28, 2010 S&P Comments On Sequoia Mortgage Trust 2010-H1's Potential Credit Strengths And Risk Considerations Primary Credit Analysts: Monica Perelmuter, New York (1) 212-438-6309; monica_perelmuter@standardandpoors.com Sharif Mahdavian, New York (1) 212-438-2412; sharif_mahdavian@standardandpoors.com Analytical Manager: Scott Mason, New York (1) 212-438-2539; scott_mason@standardandpoors.com Media Contact: Edward Sweeney, New York (1) 212-438-6634; edward_sweeney@standardandpoors.com NEW YORK (Standard & Poor's) April 28, 2010--As part of its efforts to provide insight to investors on structured finance transactions, Standard & Poor's Ratings Services has chosen to comment on Sequoia Mortgage Trust 2010-H1 (Sequoia 2010-H1), a U.S. prime jumbo residential mortgage-backed securities (RMBS) transaction slated to close today. We chose to comment on this transaction--which appears to be one of the first private-label U.S. RMBS transaction containing newly originated loans offered this year--because we believe the transaction is important to the marketplace and that our views can add value for investors. Standard & Poor's may, from time to time, choose to provide our views on structured finance transactions across various asset types and geographies, even if we did not rate the transaction, if we deem the transaction important to the market and we believe that our opinions would provide value to investors. We have reviewed the public information available on the recently announced Sequoia 2010-H1 transaction, including the preliminary offering document filed with the Securities and Exchange Commission (SEC), and have assessed various credit strengths and risk considerations for the transaction (see below), which we considered relative to our criteria. The shifting interest structure of this transaction, which uses subordination for credit enhancement, contains a seven-year lockout period for principal www.standardandpoors.com/ratingsdirect 1
prepayments, subject to a "two-times" test (which we describe in more detail below) and delinquency and realized loss performance tests. STRENGTHS 100% of the borrowers have never been delinquent on their mortgage loans; The weighted average original credit score of the borrowers is 768; The weighted average original loan-to-value (LTV) ratio is approximately 56%, and of the 27% of borrowers that have a simultaneous second-lien mortgage, the weighted average combined LTV ratio is under 60%; Over 96% of the properties are owner occupied, and over 76% of the mortgage loans are rate/term refinances; The offering document indicates that the transaction documents will include the following provisions: The definition of 60-plus-day delinquencies includes modified loans for the first 12 months following the modification; The definition of realized losses includes principal forgiveness and principal forbearance; and The transaction places an annual cap on administrative and trustee expenses. RISK CONSIDERATIONS Concentration Risk: The pool consists of 255 residential mortgage loans with relatively high balances (the average stated balance at cutoff is $932,699.35); as such, the default of one loan may have a greater impact on overall credit enhancement than for a pool that contained a greater number of loans or loans with lower current balances. If 33 average-sized loans or the 19 largest loans in the pool were to default at a 50% recovery (the weighted average original LTV ratio is 56.57%), we estimate that either scenario would result in the complete write-down of all the subordinate classes, which provide 6.50% credit enhancement to the senior class. Reset Risk: The pool consists entirely of five-year adjustable-rate mortgage loans, and nearly 74% of these loans contain 10-year interest-only periods. All borrowers will experience reset risk after five years, when their initial fixed rates become adjustable, and 74% of borrowers will experience an additional reset when their loans become fully amortizing. If mortgage rates rise, property values remain flat, and the extension of credit is limited, we believe borrowers may face difficulties refinancing. Standard & Poor s RatingsDirect on the Global Credit Portal April 28, 2010 2
Geographic Concentration Risk: More than 46% of the properties in the collateral pool are in California, and over 16% are in New York State (more than 12% are in New York City). The "Two-Times" Test: The offering document provides that in the event that the percentage of subordinate classes equals twice its original value, subordinate classes may begin to receive principal prepayments as early as May 2013, if the transaction passes certain performance tests. If substantial defaults and losses occur after the time that subordinate classes begin to receive principal prepayments, then there may be less credit enhancement available to the senior classes. Pre-Offering Review Of Property Valuations: There may have been differences in property valuations of the collateral arising from variations in the methods that the sponsors, underwriters, and third-party agents used, which may affect any potential losses for these properties. COMPARISON TO STANDARD & POOR'S ARCHETYPICAL POOL The Sequoia 2010-H1 collateral pool is consistent with the following Standard & Poor's archetypical pool assumptions for U.S. RMBS (see "Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans," published Sept. 10, 2009): It includes at least 250 loans; It includes loans that are current at the time of issuance; It includes loans with 30-year maturities; and It includes first-lien mortgages. The collateral pool for Sequoia 2010-H1 is not completely consistent with the following Standard & Poor's archetypical pool assumptions (in each category, a value of 100.00% would indicate complete consistency with these criteria): 17.55% of the loans were newly originated (within the past six months); 81.53% of the loans are secured by single-family detached residences; 19.41% of the loans are for home purchase; 26.26% of the loans are fully amortizing; 0.00% of the loans are fixed-rate; 72.84% of the loans have no simultaneous second liens; 83.75%-93.55% of the loans appear to have FICO scores greater than or www.standardandpoors.com/ratingsdirect 3
equal to 725; and 87.35% of the loans appear to have an original combined LTV of less than or equal to 75%. In addition, the collateral pool for Sequoia 2010-H1 is not as geographically diverse as Standard & Poor's archetypical pool (46% of loans are from California, and 16% are from New York State). The collateral pool for Sequoia 2010-H1 may or may not be consistent with the following Standard & Poor's archetypical pool assumptions (all of the loans in the pool would need to comply in order to be completely consistent with these criteria): Inclusion of loans with full appraisals (with an interior inspection) on the secured properties; Inclusion of loans with full underwriting and the verification of borrower assets; Inclusion of loans with full documentation and income verification through IRS Form 4506T; and Inclusion of loans with a "back-end" (which includes total debt) debt-to-income (DTI) ratio of 36%. For transactions with pools that are completely consistent with our archetypical pool criteria, credit enhancement at the 'AAA' rating category would begin at 7.50%. COMPARISON TO OUTSTANDING PRIME JUMBO SECURITIZATIONS Historically, Standard & Poor's has published quarterly trends reports describing collateral characteristics for various product types (see "RMBS Trends: Amid Volatility, U.S. Third-Quarter 2007 Prime Jumbo Securitization Volume Is Slightly Down," published Feb. 4, 2008). In our view, the collateral pool for Sequoia 2010-H1 appears to differ from historical prime jumbo collateral in the following ways: The average loan balance is higher; The percentage of interest-only loans is higher; The percentage of loans for home purchases is lower; The weighted average FICO is higher; and The weighted average original LTV is lower. RELATED CRITERIA AND RESEARCH "Methodology And Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans," published Sept. 10, 2009. "RMBS Trends: Amid Volatility, U.S. Third-Quarter 2007 Prime Jumbo Standard & Poor s RatingsDirect on the Global Credit Portal April 28, 2010 4
Securitization Volume Is Slightly Down," published Feb. 4, 2008. Standard & Poor's, a subsidiary of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research, and data. With approximately 10,000 employees, including wholly owned affiliates, located in 23 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit www.standardandpoors.com. www.standardandpoors.com/ratingsdirect 5
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