Jumbo loan production — in particular non-GSE jumbos — has increased nicely the past few quarters, but it appears that hopes for a revival in the securitization market for these mortgages may be stillborn.

Secondary market participants and executives working on Jumbo securitizations said that although mortgage originators — in particular the megabanks — are now more willing to fund jumbos than any time during the past two years, they aren't eager to sell the product to some of the newly forming conduits.

In other words, firms that were hoping to securitize Jumbos may have to wait — a long time.
"I think it's true that very few firms are selling these loans into the secondary market," said Bill Dallas, CEO of Skyline Financial, Agoura Hills, Calif.

Skyline, though, isn't one of them. The nonbank lender is currently selling Jumbos to its warehouse provider, Ally Financial/GMAC Mortgage. It is also brokering Jumbos to other institutions, but just 20% of its $1.2 billion of annual fundings are Jumbo.

It's no secret in the industry that most of the highest volume producers of jumbo mortgages include the megabanks: Bank of America, JPMorgan Chase and Wells Fargo.

Another top-ranked jumbo funder is Union Bank of California, San Francisco, whose mortgage chief, Craig Cole, is more than happy to keep the loans on the bank's balance sheet. "We like the product and we keep it all," Cole said.

And that's the problem with the jumbo securitization market: with firms keeping the loans on their books, there's no product to sell forward into new securities.

The reasoning is simple: a bank's cost of funds (its deposits) might amount to a meager 1%.

Jumbos are being originated at 4.5% and even higher, allowing the holder of the paper to reap a huge spread. (As for mortgage bankers “borrowing short and lending long” on Jumbos, most have the problem beat: the loans tend to reset after three to five years.)

And since most Jumbo lenders require at least 20% down on these loans (which are north of $729,750), the originator can sleep at night because the borrower has plenty of "skin in the game."

This leaves firms such as Redwood Trust, Mill Valley, Calif., without any pipeline of new loans to place into bonds.

Back in the spring Redwood securitized $238 million of Jumbos, the first "private label" MBS deal in almost two years. The bonds were healthily oversubscribed and Redwood, which could not be reached for comment for this article, is eager to do another deal. But the publicly traded REIT is not an originator of loans—either on a retail or wholesale basis and must depend on mortgage bankers for product flow. And therein lies the problem: a lack of sellers.

Kyle Hufford, a mortgage banker who recently accepted a job with Wells Fargo in its private banking division, said he sees no "real vast MBS coming for Jumbos," adding that it's mainly a portfolio product these days.

Meanwhile, jumbo originations in the primary market are picking up. According to preliminary survey figures compiled by National Mortgage News, in the second quarter total loan production fell by 21% compared to 2Q09. But jumbo fundings by 10 firms sampled by National Mortgage News saw their originations in the sector spike by 56%.

Leading the pack was Wells Fargo originating $3.7 billion in Jumbos — an impressive 40% gain year-over-year. Wells is putting the loans on its books.

But as Dallas pointed out, "Not every lender has that ability. There's a whole host of firms with capital problems." Wells, though, isn't one of them.

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