Craig Cole and Jim Francis, who head Union Bank's residential division, have a message for all those supposed jumbo conduits that have formed over the past year (but haven't issued any securities): "We're ramping up and don't expect to buy any product from us."
If ever there was a bank that loves these non-GSE notes it's San Francisco-based Union Bank, whose forte is originating jumbo loans, and keeping them on balance sheet forever.
"These loans have super-low delinquency rates—four-times lower than the prime delinquency average in California," said Francis who carries the title, executive vice president of consumer lending. "It's been a great loan for us."
In November the Japanese-owned bank funded $600 million of jumbo mortgages, a record. "Before that happened we were coming off four record months," said Cole, who years ago worked at Freddie Mac, which currently is allowed to buy single-family loans with balances of up to $729,750. (Anything over that amount is considered jumbo.)
Come next fall, the Fannie/Freddie loan cap will deflate by roughly $100,000, an event that Cole looks forward to. "That's good, because we want to buy those loans," he said.
For now, Union and many other banks are originating non-GSE jumbos, funding the notes with low-cost deposits. The gross profit margin (the difference between the cost of liabilities and the note yield) can easily be 300 to 400 basis points, and that doesn't include revenue generated from origination fees and other charges.
Some of its chief competitors in the jumbo space—Bank of America, CitiMortgage, Chase and Wells Fargo—originate jumbos mostly through their retail branches with some exceptions. But Union is an avowed wholesale funder of the product and has no qualms about using loan brokers. (Half its production is retail, the balance coming through wholesale.)
In fact, according to Francis, the bank has aspirations to grow its residential footprint outside of its home base of California, Oregon and Washington. "We have a national expansion strategy," said Francis, adding, "We'll follow our strongest brokers to other markets."
But which markets? He's not quite ready to reveal that, but it likely won't be Florida and Nevada where home prices have been hammered. "It will be where prices have firmed up," he said.
As for underwriting the product, the bank requires at least 20% down and depending on the exact loan the borrower chooses, Union will fund mortgages of up to $5 million.
Last week it rolled out a new 30-year, fixed-rate jumbo loan, adding to its arsenal of portfolio products. (That mortgage, too, will be offered through retail and wholesale outlets.) Prior to the launch of the new loan, Union's premier jumbo product was a five-year interest-only mortgage that had a conversion option.
Of course, if Union starts holding 30-year paper, funding it with short-term deposits, it will be "lending long and borrowing short," a strategy that hurt the S&L industry a few decades back.
Asked how Union will hedge 30-year mortgages that remain on its balance sheet, Cole said he didn't have any insight into that part of the business. "It's a treasury function independent of my operation," he said. (Union and its forebear banks have been around since 1864 so it must be doing something right.)
Then again, if rates start moving the wrong way on Union it can probably sell its 30-year jumbos into the secondary market. After all, there should be plenty of buyers, or so the industry has heard.
