A California lender began selling jumbo loans this month to global asset manager BlackRock, proof that private investors are not waiting for the securitization market to fully recover before getting back into mortgages.
Prospect Mortgage in Sherman Oaks became the first mortgage lender to originate and sell Jumbo loans to BlackRock since it created a $1 billion mortgage investment fund last year with the specific purpose of securitizing prime Jumbo loans.
For now, some of the loans will be held in portfolio or may be distributed to other BlackRock funds, said Jeff DerGurahian, Prospect's senior vice president of capital markets. "This is the first step," he said. "Investors will look for a securitization exit once issuers have more clarity on how the rating agencies will behave, and credit support levels will lead to more clarity on the pricing."
BlackRock declined to comment.
So far, Redwood Trust, a Mill Valley, Calif., real estate investment trust, has been the only company securitizing Jumbo loans since the $1.5 trillion private-label market froze up in 2008.
Though Redwood's second jumbo deal in 10 months got a preliminary 'AAA' rating last week from Fitch Ratings, Moody's Investors Service and Standard & Poor's raised concerns about the high loan amounts, overconcentration in adjustable-rate loans and the large number of loans on California properties, particularly in earthquake-prone San Francisco.
James H. Francis, an executive vice president and head of consumer lending at the $79.4 billion-asset Union Bank in San Francisco, said the difference in opinion among the ratings agencies on the Redwood deal "is indicative that there is not good consensus on what constitutes a high-quality Jumbo mortgage yet."
"Until you get that, it's going to be more of a private market," Francis said, adding that "the lack of capital markets execution is keeping the spreads relatively strong."
That is one reason banks like the flagship unit of UnionBanCal Corp. are holding on to Jumbos loans they have originated, at least for the short term. (Union Bank's volume of Jumbos has grown 50% in the last five months, to more than $600 million a month, Francis said.)
Though investors such as Goldman Sachs and Private National Mortgage Acceptance Co. (known as PennyMac) have signaled their intention to sell MBS backed by Jumbo loans, none has done so yet. Most lenders are hesitant to write mortgages on high-priced homes without a reliable outlet for selling them, and more than half of all Jumbo loans are being sold to Fannie Mae and Freddie Mac.
Scott Buchta, the head of investment strategy at Braver Stern Securities, said high-quality Jumbo loans are a good asset for banks' balance sheets until commercial lending picks up.
"Larger banks have also been using Jumbo loans as a way of cross-selling their other business lines and have been successful in expanding their client relationships," Buchta said.
Though Fannie and Freddie currently buy loans of up to $729,750 in certain high-cost markets, many counties still fall under the lower loan limit of $417,000. (The maximum conforming loan limit will drop to $625,000 on Oct. 1.)
Ron Bergum, Prospect's CEO, said his company is targeting Jumbo markets that fall under the lower loan limits, which will add smaller loan sizes to the overall mix.
Prospect's two main products for BlackRock were 30-year, fixed-rate and five-year, adjustable-rate mortgages with minimum FICO scores of 700 and a 20% down payment for up to $1 million and 30% down payment for larger credits. Loans of from $1 million to $2 million required two appraisals, and BlackRock accepted no more than four loans to the same investor-owner, said Rebecca Rosselli, Prospect's chief conventional underwriting officer.
Keith Gumbinger, the president of HSH Associates, a financial publisher in Butler, N.J., said hybrid 5/1 ARMs have become "the most viable alternative to the traditional 30-year, fixed-rate mortgage" because of the savings to the borrower.
"Over a five-year period, a borrower wanting a $200,000 loan who chose a 5/1 product would save $12,978 in interest cost while retiring about $3,551 more of the outstanding balance of the loan compared to the 30-year fixed," Gumbinger said. "Of course, if market conditions should turn unfavorable at the end of the fixed-rate period, a borrower might give all that back (if not more) over time."
Steve Donahue, the vice president of mortgage originations at $1.4 billion-asset Technology Credit Union in San Jose, Calif., which rolled out a super-jumbo, 30-year, fixed-rate mortgage this month for balances of up to $3 million, said there is "a lot of fear about doing anything other than a fixed-rate loan" because so many borrowers were given ARMs with negative amortization at the height of the housing bubble.
"We've been beaten up so much about all the things that happened about ARMs, without seeing the benefit," said Donahue.
Grant Bailey, a senior director at Fitch, said investors are worried about the mix of loans in securitizations because of the high level of losses and delinquencies from 2005 to 2008. More than half of the Jumbos originated during that period did not require verification of the borrower's income, and 25% were "piggyback" second liens, a sign the borrower did not have a big enough down payment, he said.
"The prime Jumbo loans being underwritten today have more documentation, equity and better credit, so the past performance is not indicative of how these new loans are going to perform," he said.
Adjustable-rate mortgages accounted for 35% of the overall loan market in 2007, but their share has plummeted to less than 6%, with jumbo loans accounting for a recent uptick, said Jay Brinkmann, chief economist at the Mortgage Bankers Association.
Still, Brinkmann warned, "It's not clear with some of the banks whether they are truly interested in origination for long-term portfolio because hybrid ARMs raise real interest rate issues."