Making a Move into Jumbos

When it comes to mortgage banking, Jess Lederman has been around the block and then some. During his long career he's worked at an MI company, launched Bear Stearns' "A" paper conduit two decades ago, put Ohio Savings on the map as a national correspondent lender, and worked for Countrywide Home Loans in global risk management. (OK, maybe don't hold that last one against him.)

You might say he's seen it all. And because he's seen it all he looks at the jumbo mortgage market today and realizes there's a huge opportunity in the space. How huge? "There are excellent returns with minimal risk," he says. His firm's maximum loan amount? Answer: a cool $4 million.

Mr. Lederman, with the blessing of his current employer, is slowly ramping up loan production of jumbo loans, that is - mortgages that exceed the Fannie Mae/Freddie Mac loan limit of $729,750. The way he and others see it there's no secondary market for jumbo production because securitizations of all things nonconforming seized up during the worldwide credit crisis of 2008. The jumbo secondary has yet to return and the way things stand now no one is exactly holding their breath in regard to the jumbo TALF (Term Asset-Backed Securities Loan Facility) possibilities via the U.S. Treasury. Of course, Mr. Lederman isn't the only mortgage executive who sees an opportunity in funding and holding jumbos but there is a twist to the story: his employer is Kinecta Federal Credit Union, which is based in Manhattan Beach, Calif.

Traditionally, CUs haven't been huge players in mortgage banking with the exception of just three firms: Navy Federal, State Employees CU of Raleigh and Pentagon FCU, which like Navy is headquartered in suburban Virginia just across the Potomac River from the nation's capital.

And there's one other twist as well: he plans on funding jumbos through not only the CU but loan brokers. That's right: loan brokers - those third-party salesmen and women whose reputations (you might say) have been tarnished by the nation's subprime and payment-option ARM meltdown. But Kinecta isn't using just any old loan brokers. "We're only going to use brokers we know, trust and have vetted," said the former Bear Stearns executive vice president. "For us to work with them they need to have years and years of experience."

There's one other catch: if brokers and correspondents want to use Kinecta they have to promise the institution that it will also sell a majority of their Fannie, Freddie and FHA production to them as well. "In return for using us we will want a disproportionate about of their agency business," he said.

The underwriting guidelines that Kinecta has established include maximum loan-to-value ratios of 80% (though its current average LTV is 60%) on fully documented 5/1 ARMs that are also fully amortizing. With Kinecta's cost of funds (it uses retail CDs) so low these days Mr. Lederman believes the CU will make a killing off the difference between its assets and liabilities.

And just how much demand is there for jumbo lending in Southern California where Kinecta is based? Since January the CU has funded $500 million in product. (Mr. Lederman joined the lender eight months ago.) "We plan to grow this gradually," he said. "We won't be shooting for the stars."

Paul Muolo can be e-mailed at Paul.Muolo@SourceMedia.com.