The recent contraction in the spread between Jumbo- and conforming-balance mortgage loans has obscured continued problems in the market for non-agency loans. The lack of a securities market outlet for loan production means that virtually all loans ineligible for agency execution must be held in portfolio by the lender. In addition to requiring LTVs of 75% or lower, the pricing of non-agency loans is dependent on each lender's balance sheet and capital position, along with their appetite for credit and interest rate risk. Ultimately, the banking system's collective balance sheet is not large or strong enough to indefinitely support the upper tier of the housing market on its own.

In this light, a key question for the housing markets (especially in high-cost states such as California) is how soon the new-issue private-label market will recover and provide economical execution for prime jumbo-balance originations.

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