Redwood Trust has taken to market a $290 million jumbo mortgage-backed security. It did a similar one last year. Why are these deals significant? They are the only jumbo MBS deals done since the mortgage crash.
This is truly a sobering statistic, especially in light of the current desire by government to shrink its role in mortgages and have private companies step up.
About half a billion dollars over the last three years. That’s the extent of nonconforming secondary activity. Does anyone think half a billion dollars will be enough to underwrite a healthy secondary market for nonagency, nongovernment mortgages?
Keep in mind, jumbos are not subprime mortgages, the bane of the asset-backed securities boom that collapsed the mortgage and housing bubbles and almost single-handedly called down recessions in countries all over the world.
No, jumbos are loans above the conforming limits. They are made to people more able to afford higher mortgages and bigger houses. Now, no one thinks that all wealthy people manage their money well. But there’s a better chance of a good mortgage than there is with many other people.
The two Redwood Trust deals are probably the most scrutinized MBS in history.
They are well-scrubbed pools of loans, with an average loan-to-value of 59% and an average FICO score of 775. They are squeaky clean.
From no real underwriting, the nonconforming market has swung all the other way to super underwriting.
The question is, is this the only part of this market that is going to be liquid? Because it is an awfully small part.
It could be the jumbo market tightness will ease as lenders become more comfortable making loans and investors become more comfortable in buying them.
But make no mistake about it, there’s trouble ahead.
This market cannot, at current rates, stretch to accommodate the demand that there will be for this product.
Even adding in the hard-money lenders, who charge a pretty penny for access to nonconforming money, will never be enough to do the job.
Perhaps that’s why the government estimates Fannie Mae and Freddie Mac will be around for another five to seven years.
That’s a long time in the mortgage world—time for a whole cycle. Let’s hope this one isn’t as dizzying as the last one was.
