There has been a lot of speculation about a more full-fledged return of the jumbo securitization market. But it has been a long time coming, so in the meantime, investors should not overlook the jumbo whole loan market that recently began to stir.
“There has not been much in the way of standalone jumbo pools available to the market up until now,” said Robert Wellerstein, a managing director at
The jumbo market has been dominated by large banks and the small number of securitizers that exist, said Wellerstein. “Mortgage companies and smaller banks are looking for correspondent relationships to sell into,” but these have not been as competitive as they would like.
There has been some legacy bank portfolio product from 2006, 2007 and 2008, but “newer production pools not seen very often,” he said.
“This is a pretty good size pool in this day and age based on transactions going on now,” he said of the pool up for sale, which has a June 5 bid deadline.
When asked what price discovery is like in this market, he said, “There are some rate sheets [from the money-center banks] but they are not necessarily going to tell you how a bulk eight-month old pool is going to trade. It’s a general ballpark, not a specific point to look to.”
The $117 million pool “could be one of those early indicators of where things might be going,” Wellerstein said. “It could lead to more banks taking a little bit more of a chance, holding loans for some period of time then selling on a bulk basis like this one.”
But he stressed that, if it does, it is not going to happen overnight. “There are not a lot of deals similar to this out there and there haven’t been for some time, but deals like this may be a bellwether for what’s to come next,” he said. “It’s going to be an inch-by-inch process.”
The significant run-up in long-term rates that recently pushed Freddie Mac’s weekly averages above year-ago levels for the first time in a while could help fuel such a move, if sustained, Wellerstein said. But he acknowledges rates are tricky to forecast and can change quickly.
That being said, “Right now, there is a concern about all production [volumes] with this rate move. We’ve seem rates move pretty quickly in the last week and it’s got heavy refi shops pretty concerned.
“With rates rising, there is more of a need than ever to expand people’s menus,” and if this trend continues, “I think we will eventually see more pools like this or that might be a little larger than this,” said Wellerstein.
This could even compel some banks to return to third-party origination, he said, when asked whether this could occur as a result. Originators will likely be considering “every avenue available to them to create new production.”
Although loan product menus may be under pressure to expand, he said the market is producing “extremely low LTV, high FICO” product that is “as clean as you can get to get banks and investors comfortable again.”
“Banks are looking for very low credit risk product, and they need some spread (compared to what has recently been available),” so the jumbo sector is relatively attractive as it produces more yield than conforming product. Also, “banks and insurance companies prefer whole loans.”
When asked about prospects for whole-loan participations, he said, “I don’t think we’ve seen that part of the market happen just yet and I don’t see it imminently. People are looking to have control of the assets Participations, I think, come later; once the market more fully developed.”
A move from whole loan trading, toward participation and then more jumbo securitization is “what people think will happen,” said Wellerstein, when asked about this. “Yet it’s been several years and [the secondary market for jumbo loans] really hasn’t taken off. So it’s really tough to predict.”
