The forecast for the residential mortgage-backed securities market dropped by $10 billion to $15 billion as demand for jumbo whole loans reduces the appeal of non-agency RMBS this year, the latest report from Standard & Poor's said.

But this is not exactly market shattering, according to Ron D’Vari, CEO and co-founder of NewOak Capital, as secondary market investor already adjusted their activities.

“As the banks offload non-performing loans and home prices rise, they are creating a hole in the balance sheet that they fill up with high quality non-agency jumbo mortgages,” D’Vari said. 

And prime jumbos are ideal assets today, he noted.

"Jumbo loan rates are close to agency levels, reducing the economic benefits of securitization, in our estimate,” S&P said. “Prime jumbo is projected at $7.5 billion, with year-to-date RMBS issuance, including seasoned and NPLs, at $3.4 billion. Prime jumbo issuance is $1.6 billion year-to-date versus $13 billion in 2013.”

Jumbo whole loans are often sold on the secondary market. Sellers may no longer earn interest, but get the principal returned in order to make more loans. Profits are garnered primarily through origination fees.

“As banks offload distressed REOs and NPLs, they will need to derive yield from other assets that are capital efficient,” D’Vari said. “They have the balance sheet, excess capital, and cheap funding.  Therefore they naturally want to put it to work so they are allocating available product in whole loans and fresh new originations to their portfolios. They are producing less new mortgages than their natural need so securitization is not their first choice. This is causing banks to have an appetite and a need to satisfy it.”

“The product is being originated and the banks like it. The risk of the jumbo market is to some extent when originated properly even better than agency when it is fully documented, tightly underwritten and valuations are well supported. Given the tight underwriting of today and the awareness of quality, banks are tending to keep them,” D’Vari said. 

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