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Jumbo MBS, Which Showed Signs of Life, Is Back on Life Support

2016 volume weak to date, perhaps because of TRID

Sam Khater    |    Mortgage Performance

Part II of a look at the current private-label securities market, to review Part I click here.

Pity the poor jumbo mortgage-backed security. When the mortgage market blew up a decade ago, jumbos had the misfortune to be a nonconforming product when subprime made nonconforming a dirty word. Many jumbo securities were prime credits, but that didn’t save them. The sector has spent most of the last ten years trying to re-establish a steady market. And just when it seemed that the market was gaining traction, economics, low interest rates and compliance all turned into headwinds.

The overall private-label securities (PLS) market, of which jumbos are a part, still doesn’t even have an upside. It has been basically a flat line near zero since its calamitous falloff in 2007. (Just as a point of reference, the prime jumbo purchase market topped $100 billion in 2005.) That market, pretty much flat for years (Redwood Trust was the biggest, and sometimes the only, securitizer in the market), started to spike up again in 2012.

Prime jumbo securitization never returned to its pre-crash peaks, but it did manage to register a pulse until the summer of 2015 when it cratered again.

According to Kroll, prime jumbo securitizations accounted for 38 deals in 2015. So far this year, only two prime jumbo deals have come to market, with a third just announced. And at least two issuers have said they are no longer doing securitizations of this product.

It’s not that jumbo mortgages weren’t and aren’t popular. In fact, demand drove the jumbo yield below the conventional yield in a highly unusual inversion in 2013. But securities were suffering from formidable competition on the whole loan side. Banks were holding a lot of jumbos in their portfolios, keeping them out of the securitization market.

The new TRID rules, some observers believe, are exacerbating the challenges of prime jumbo securitization. Inside Mortgage Finance, for example, recently noted the deal just announced, a $332 million prime jumbo issuance, appears to be the first to include jumbos subject to TRID.

Having a healthy private-label securities market is an essential part of a healthy, robust mortgage market. It is the missing piece in the recovery. No one is interested in the kind of dangerous boom and bust ABS that fried the markets ten years ago, but responsible non-agency lending has been a respected segment of the market for a long time. What’s a healthy level? It is hard to put a top number on it, but the bottom number is pretty easy: it should be higher than zero.

Earlier this month, the Treasury-led group that is working on ways to re-start the private-label securities market unveiled its concept of a deal agent: a key element many observers believe that is needed to assuage investor concerns. Interestingly, the razor-thin economics of jumbo securitization and the pristine nature of the collateral that is being packaged probably means that deal agents won’t debut in prime jumbo securities.

So until interest rates go up…and issuers and ratings agencies get more comfortable with TRID… and the big banks says “No Mas” to portfolio-ing whole loans, the outlook for prime jumbo securitization is cloudy.

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