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Redwood Trust Inc., the specialist in jumbo mortgages, said it entered into a risk-sharing deal with government-backed Fannie Mae on smaller home loans.
The real estate investment trust agreed to take the first 1% of losses on $1.1 billion of loans that will be purchased by Fannie Mae this quarter, according to a quarterly report for shareholders posted today on the Mill Valley, Calif.-based company’s website.
“We hope that it is the first of many such transactions for Redwood,” Chief Executive Officer Martin Hughes and President Brett Nicholas wrote, adding that the arrangement would make the loan sales more profitable.
The REIT expanded in December past jumbo mortgages and into the market for so-called conforming loans small enough to be purchased by Fannie Mae or Freddie Mac. Redwood joins JPMorgan Chase Co. in finding new ways to expand on the risk-sharing transactions that the mortgage giants have been undertaking since last year to reduce dangers for taxpayers.
JPMorgan created $47 million of bonds last week that can lose principal if mortgages guaranteed by Fannie Mae default. The various forms of risk-sharing that Fannie Mae and Freddie Mac have used are “the kind of reform people should be happy about” as the companies’ future fails to be decided by Congress, Fannie Mae CEO Timothy Mayopoulos said today on a conference call with reporters after releasing earnings.
“We are essentially going from being a credit storage company to a credit moving company,” he said.