Known for being an originator of high-quality jumbo mortgage loans and for focusing on high net-worth clients, three-time MBS issuer, San Francisco-based First Republic Bank, continues to maintain an impressively low loss record.

"We try to distinguish ourselves by the strength of our underwriting and the quality of the loans that we originate," said Willis Newton, senior vice president and chief financial officer at the bank.

According to Willis, at the bank level, there is currently no delinquency in its single-family home-loan portfolio. Further, at the end of last year, First Republic's non-performing assets comprised only 4% of its total assets.

This is especially noteworthy considering the markets that the bank operates in. First Republic's offices are located in California, Nevada and New York. Though the housing market in California has been hard hit of late -- with home prices in California, particularly in Northern California, not as high as they used to be and perhaps 10% to 15% lower than their peak --Newton maintains that the glass is still full and that there are people who are capable of safely negotiating the credit risk that exists in all real estate cycles.

"Our view is that there have been more houses that have come on the market then have been absorbed in the market over the last six months, which provides a buying opportunity for strong buyers, particularly in the million-dollar price range," Newton said. "So we have not experienced increased delinquencies in our home-loan portfolio. That is part of our story: that we specialize in the particular lending that we do and when there are stressful conditions we have been successful in performing well under those."

Securitization strategy

Thus far, First Republic has completed three Real Estate Mortgage Investment Conduit (Remic) securitizations. The most recent one, a $409 million deal backed by shorter-term, adjustable-rate single-family loans, was completed last December. The first two securitizations were done in 2000.

According to Newton, the bank's most recent transaction had very good execution, with Moody's Investors Service and Standard & Poor's rating 97% of the loans in the pool to a triple-A. Greenwich Capital and Salomon Smith Barney were the underwriters on the transaction.

Newton said that the securitizations have helped the bank's loan portfolio grow.

"Securitizations allow us to originate more loans which we are not required to hold on our balance sheet, thereby allowing us to turn around and originate more loans," stated Newton.

The loan origination process allows the bank to attract new customers, to which they could cross-sell private banking services to, such as providing basic checking-account and deposit products, investment advisory trust services, brokerage services as well as other loan and deposit products.

First Republic is likely to do about one to two transactions for the next several years in the $300 million to $400 million range.

"That basically depends on where interest rates are and the types of mortgages that we can originate," said Newton. "Going forward, we do expect to do deals that are similar to the deal structures we have done in that we would use our high-quality mortgages. We are building what we consider a good following of investors who understand our product."

Newton explained that the bank has been focused mostly on the Libor market, which is a very large, liquid and broad market. Though there are some fluctuations in spreads, the Libor market is considered to be very efficient.

"We think under most conditions we would be able find an acceptable time to do a deal if we were ready to do so," he stated

He also said that the bank would be focusing on originating and securitizing adjustable-rate mortgages.

"In most environments, we won't be comfortable holding loans with interest-rate risk for a long enough time to really build up a pool worth $300 million to $400 million of 15-year or 30-year fixed-rate loans," Newton noted.

Good performance despite lower expected volume

Though First Republic is expecting refinancing volume to be down this year after experiencing record highs in 2001, business should still remain strong, Newton said.

"As long as interest rates remain relatively low, strong buyers are still finding it an attractive market to purchase homes, so while the refinance business is likely to be down, we don't necessarily see that as a negative," he added.

With less refinancing activity, the loans that are on originators' books or on one's servicing portfolio are also not paying off as rapidly, and there is sort of a natural hedge in that.

Newton is optimistic about the bank's volume growth for 2002.

"We are still seeing a strong backlog right now and we are also seeing more purchase activity," said Newton. "So we are very optimistic about the volume that we would be originating this year."

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