It seems that on good MBS days, the spread between conforming and conforming jumbo narrows to about .125% in rate.  On bad MBS days, it widens to .25, .375 and worse.  Today may have set a record – the spread was .75% at day’s end!  I have read that part of what causes the spread is the FNMA MBS pool requirement that a maximum of 10% (or is it 15%?) can be comprised of conforming jumbo loans.  But I don’t understand why the spread seems to narrow and widen depending on the day’s trading.

 

One of the lender’s I work with sent this out:

 

Citing data from LPS Applied Analytics, a mortgage-data research firm, the Wall Street Journal reports that about 6.9% of prime, jumbo loans were at least 90 days delinquent in December, up from 2.6% in the year earlier period. Delinquencies of non-jumbo prime loans that qualify for government backing increased to 2.1% from 0.8%. Defaults on jumbo mortgages tend to result in outsized losses for lenders given that expensive homes are much more difficult to sell when the real-estate market sours. According to the article, three lenders accounted for nearly half of all jumbo loans made in the first nine months of 2008. The top two originators, Chase and WaMu, made more than 25% of all jumbo loans. In addition, BofA and Wells Fargo each accounted for 11% of the jumbo market.

 

Do you think that this may have caused the spread to have widened?  If so, this will be really bad for high-priced areas such as Southern CA.

Still hoping for someone to respond to the original post.  Until the recent spike in rates starting Wed, the spread had mostly been .125% to .25% for the last month.  Until some sanity returns to lender pricing on conforming jumbos (loan amounts from 417k to 625k), I'm posting a daily 'suck-o-meter'.  Today's value: .625% (5.0%, slightly better than par for conforming, 5.625%, slightly better than par for conforming jumbo).

I know there must be a few LO's out there that are being adversely affected by this.

Today's 'suck-o-meter' is back to .75% in rate.

Today's spread measurement from conforming to conforming jumbo, which I call the 'suck-o-meter' has improved to .5% in rate.  Still have no idea why this spread shot up last week.  Can't imagine that the one Wall Street Journal article could have that much impact.

Forgot to post yesterday's 'suck-o-meter', but today's is really awful.  .875% in rate.  Good-bye agency jumbo. [:'(]

Danno, sorry to not see more responses on this.  I wish I knew more about the confumbo secondary.  I'll talk to the ninja and see if he has any wisdom.

 

Can we get the suck-o-meter added to the site?   lol

I'd settle for a little understanding on what forces are driving this sudden spike in the conf to conf jumbo spread.  Today's suck-o-meter opens at .625, where the random # ends at the end of the day, nobody knows. 

The issue is pretty simple.  It used to be that a jumbo loan could be securitized easily and economically in a private-label (i.e., non-agency) deal.  Given the weak performance of mortgages in general and the lack of liquidity in the MBS market, issuance of non-agency MBS is dead--buyers of the high-rated pieces exist at really wide levels (mid-80s for new production), and subordinates are trading in the area of 10-50 cents on the dollar.  The economics of deal isssuance imply mortgage rates in the mid- to high teens.  Therefore, lenders have to hold newly originated jumbo loans in portfolio.  No one will get fired in this market for being too conservative; hence you have 7%+ rates for 75% LTV loans.

Your response refers to non-agency jumbo, in which you correctly state that these 'true' jumbo loans currently have no secondary market.  The issue I'm referring to in my original (and other posts) in this thread refers to 'agency jumbo', or 'conforming jumbo'.  Loans between 417k and the agency jumbo limit of 625k.  These loans are eligible for purchase by Fannie or Freddie and can be pooled into MBS (with certain restrictions, as I mentioned originally). 

BTW, the proposed 'stimulus' bill in Congress could raise the agency jumbo limit to 2008 levels (729k max) in some metro areas.

Let me inject pure speculation.  Agency jumbo loans were made to help families in areas that saw great appreciation during the boom years.  They arenow losing the inflated value.  Also, my guess is the default rates are higher on these loans due to several factors.  When layering risk, these loans rank high on the risk-o-meter, so they are priced accordingly.  Similar to the LLPAs that we see for other risk factors.

Could be, but it's a sudden, massive hit that just took place about 2 weeks ago.  Other LLPA's or risk factors are at least disclosed to the loan agent with an appropriate hit to pricing, but this is completely undisclosed.

Danno,

It is my understanding from a Wells contact that I have on the secondary side is that it's purly the 10% rule. There are no structural reasons why conf-jumbo should be worse priced than conforming other than the .25% LLPA that is imbedded into the rate already. Historical differences between conforming and jumbo existed because of (perceived or not) the illiquidity of not being able to sell them to agency. That difference is now elminated, but the agency's are artificially limiting their exposure to them because of the lack of historical performance of these particular pools.

We are going to see the spreads on these things shrink significantly over this year, and especially so if (when) the agencies remove this conservative rule.

I had mentioned the 10% rule in my original post, but that's been in effect since (I believe) 8/08.  Why did the spread between conforming and conforming/agency jumbo suddenly spike about 10 days ago?

Sorry, did not see the "conf jumbo" in your post when I jumped in.

I looked at the Fannie loan-level price adjustments that were posted in December, and the add-ons for jumbo-conforming loans have stayed about the same since last year.  Before the 10% rule went into effect, jumbo-conforming loans couldn't be delivered at all into pools, but the GSEs were buying them for portfolio at the same (or approximately the same) price as conforming loans, which pushed the spreads last spring down from around 75-100 basis points over conforming to on top of conforming (or maybe an either higher).  What I'm suspecting is that the dollar value of these loans is too much for issuance through pooling to absorb, and the GSEs aren't buying them for portfolio anymore.  (I'm trying to confirm this...unfortunately, all my best sources have been laid off.)

One thing to note--investors definitely think the jumbo conforming product is riskier from a prepayment standpoint--bigger loans are (generally) more responsive to refi incentives.  That's the logic behind the 10% cap...

Bill Berliner:

What I'm suspecting is that the dollar value of these loans is too much for issuance through pooling to absorb, and the GSEs aren't buying them for portfolio anymore.  (I'm trying to confirm this...unfortunately, all my best sources have been laid off.)

My understanding is that the GSE's never intended to buy conforming jumbos for portfolio and all loans were bundled into MBS, subject to the 10% rule.  Any loans left over would be held in portfolio for a brief time until they could find an MBS pool - at least that's my guess.

It still seems odd that about 2 weeks ago, the conf/agency jumbo world came to an end. 

BTW, today's 'suck-o-meter' has slightly improved to .5% in rate.  Slightly less 'sucky' today.

I'm certain the GSEs were buying virtually all of the production last year. They couldn't be included in deliverable pools at all last year, and the jumbo conforming pools (I don't remember the exact ticker, but they have one) were trading 2 pts back of Fannies. 10% rule only went into effect as of 1/1/09 for loans originated after 10/1/08. So it may just be that the system got clogged becuase of the 10% rule after the pop in applications last month. If so, suggests that the 'suck-o-meter" will continue to tighten, once the overflow gets absorbed. I have never worked with the "suck-o-meter"--could describe a lot of Wall Street risk systems.

"

One thing to note--investors definitely think the jumbo conforming product is riskier from a prepayment standpoint--bigger loans are (generally) more responsive to refi incentives.  That's the logic behind the 10% cap..."

 

That makes sense. I wonder, however, if this isn't made up for by the fact that there are certain fixed costs associated with originating these that are spread out over larger pools (or same sized pools w/ less work). Probably not.

 

Interesting thought...keep in mind, though, that "deliverability" (i.e., what loans can be included in a pool that's deliverable into a TBA forward transaction) is disctated by SIFMA, which represents the dealer community (which in turn listens closely to their customers).  Investors are really sensitive to anything that will change the prepayment characteristics of deliverable pools.  Mortgage bankers would love to change deliverability to include more products, but the street has vetoed it.  (Even trivial changes--like reducing the amount of required servicing--have been shot down in the past.)

You cant' really look at the spreads on MBS vs. the rate sheet as a cause of jumbo defaults.  The interest rate spread built into jumbo loans already gives them the margin necessary to negate the risk of a larger loan defaulting (which cause more of a loss in foreclosure than a lower loan). The spreads from MBS to rate sheets prior to Thanksgiving week 08' averaged .25%-.75% in yield from the corresponding MBS coupon.

Once rates dropped it's become early payoff management and pipeline control. That's why we can see a 30 tic improvement in MBS and only get .25% to the rate sheet.  Simple supply side economics at that point, why lower rates to get volume if you can't close what you already have in the pipeline.

Needless to say monitoring MBS to predict future rates for a single investor is next to insanity because you can't predict the internal pipeline management or payoff concerns.  All we can do is watch MBS to get an industry direction and then lock and place the loan. For example I had this discussion with a loan officer this week asking about what rates would do for the next day.  Based on MBS we looked like improvement or stability at about 90%. Next day when he went to lock the lender worsened 1% or more in yield to keep turn times at 3 days. All of our other investors improved on the day.

My recommendation is to watch MBS to predict industry movement but take what you get on any single day from the investor. If I have a potential shopper or client I can advice, float, lock etc. But once it's a file at a lender you shouldn't be watching MBS to know if you should lock that loan because it potentially won't matter (especially is you're looking at a lender who's run top 3 in rate for a period, pipeline would fill and the risk of non-market movements are much more likely).