JPMorgan Chase introduces new nonagency issue jumbo model
Nonagency jumbo loan originations picked up over the last few years, reaching just under $100 billion in 2012.
Following suit, a reemergence of private-label jumbo securitization is well underway with transactions reaching $3.5 billion in 2012 and up to $5 billion already this year, said analysts at JPMorgan Chase.
"This pace should pick up — in all we expect $20 billion of securitization in 2013. Due to tight lending standards and the creation of the jumbo conforming market, these post-crisis loans are significantly higher credit quality and larger loan size than their pre-crisis counterparts," JPMorgan (JPM) pointed out.
Consequently, these new jumbo borrowers refinance much more efficiently than previous borrowers since they took out mortgages when lending standards were tight.
Meanwhile, low rates and few barriers to refinancing have led to fast prepayment rates for jumbo loans.
Thus, it has become critical to assess prepayment risk for this ‘new’ class of loans.
"Therefore, we introduce a new issuance jumbo model to address these needs. Our new model cover 30-year, 15-year and hybrid adjustable-rate mortgage loans," JPMorgan analysts stated.
The current JPMorgan loan level transition model is designed to assess credit risk on lower quality loans with different characteristics.
However, this methodology seems to be too time-consuming to run bonds in an option-adjusted spread framework.
"We therefore ‘bootstrap’ the new issue jumbo model from our current pool level agency models, with the addition of a simplified version of our nonagency severity model to further incorporate credit risk," the report explained.
With only a few years of limited data available, it’s difficult to base JPMorgan’s new model entirely on new issue jumbo data alone.
Fortunately, jumbo borrowers by and large behave similarly to agency MBS borrowers, with only minor differences.
Nonetheless, the effort to properly model prepayments on jumbos still faces a number of hurdles and as a result, JPMorgan will continue to actively update the model as more data becomes available.
"Regardless, our model in its current state will be as invaluable tool for investors and is a major first step in developing a more complete analytical framework," the analysts concluded.