The reduction of the nonconforming loan limits at the end of September will bring an end to the agency Jumbo conforming asset class. This can also cause slower prepayment rates as well as higher refinancing rates available to these Jumbo borrowers.
Conforming Jumbos emerged as a result of the Securities Industry and Financial Markets Association's decision not to include higher-balance limit MBS in TBA trading, explained analysts at FTN Financial.
Separately, according to JPMorgan Securities research anaysts, only about 13% of non-agency RMBS borrowers have mortgage loans that fall under agency conforming Jumbo category, currently between $417,000 and $729,000 in high cost areas.
Fannie Mae has by far produced the larger share of conforming Jumbos relative to Freddie Mac. There have also been a class of GNMA II Jumbo securities that were created.
According to Bankrate.com, the national average rate this week for a 30-year conforming mortgage is 5.02% and the average for a 30-year Jumbo mortgage is 5.59%.
"Conforming Jumbo falls somewhere in between those two levels — the Jumbo conforming market is far out of the money at this point in the rate cycle," FTN analysts said, adding that the fact that it is out of money can affect prepayments speeds.
Prepayment speeds for conforming Jumbo MBS in the next few months leading up to Oct. 1, should increase.
However, FTN analysts said that "after any initial uptick in refi activity, refi options for conforming balance borrowers will be limited to the private markets (i.e., bank balance sheets and any putative securitization market), and those rates are likely to remain higher than conforming execution for some time."
Jay Menozzi, chief investment officer at UCM Partners, said in an email that most Jumbo borrowers will likely be able to refinance in the future. "We would think that a significant portion of these borrowers would fall between $417K-$625K loan sizes and would still be eligible for agency conforming Jumbo execution provided that their credit remains very strong, current LTVs are low, and they have full docs," he said.
Menozzi also believes that banks are likely to ramp up their Jumbo origination platforms — both agency conforming and non-conforming — which will narrow the spread between non-agency Jumbo loans and agency conforming mortgages.
But banks are likely to limit lending to borrowers with “super-clean”, pristine credit. "We do not foresee a significant pick-up in non-agency issuance yet, and would think that we’ll see around $2-$4 billion in new issuance of non-agency RMBS securitization deals," Menozzi said. "More importantly, some of the main impediments to new issue Jumbo securitization are regulatory uncertainties that confront private label securitization. The new risk retention rules may potentially trigger the consolidation of the entire deal that would lead to much higher capital charges that those against whole loans."
While some borrowers may be left in the lurch as the origination for agency conforming Jumbos begins to dwindle, investors can look forward to less supply and an improving convexity profile in this market.
"Many seasoned prime and Alt-A fixed-rate bonds are currently trading above par and any refinancing impediment will improve their convexity profile, making them more appealing investments relative to agency MBS," Menozzi said.