NOV 19, 2012

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How Long Will the Jumbo ‘Carry Trade’ Last?

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How can a depository go wrong on this mathematical equation: Originate jumbo balloon loans at 4% and fund them with deposits that cost (say) 75 basis points. It’s seven-year paper. The profit margins are nothing short of huge. The borrowers (hopefully) are well heeled ‘rich folk’ with equity or sizeable downpayments.  The only thing you have to worry about is a spike in short-term rates (highly unlikely) or that banking regulators might crack down on balloon mortgages (which is possible.) So, when will this jumbo ‘Carry Trade’ nirvana end? Answer: If I were that smart I’d be trading jumbo MBS for a living.

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