CMC president says Treasury GSE reform aids jumbo securitization market
There are several factors that could spur a resurgence in the jumbo mortgage market, according to Tom Millon, founder and president of mortgage origination firm Capital Markets Cooperative. And the proposed jumbo limit reduction for loans insured by Fannie Mae and Freddie Mac is a step in the right direction. Furthermore, continual cuts to the limits have Millon anticipating new jumbo residential mortgage-backed securitization issuance in 2011, similar to today's announcement from Redwood Trust. Last Friday, the Treasury Department released its white paper with three potential options for restructuring the government-sponsored enterprises as well as for gradually phasing them out of the mortgage industry all together. One suggestion was to lower the conforming jumbo loan ceiling to $625,500 from the current $729,750 come Oct. 1. Millon said while reducing the agency jumbo cap is one step toward engaging the private market for jumbo originations, the current proposal is a not substantial enough decrease to make a huge difference and further lowering would be helpful to the private-label market. "It won't have a huge effect," Millon told HousingWire in an interview. "Originations are anemic at best, and jumbos even more so." Capital Market Cooperative originates more than $25 billion worth of mortgages annually, with a strong presence in the jumbo market. In January, the firm originated approximately $2 billion in mortgages, including a handful of jumbo loans. Millon said it has been difficult for the market to get back on its feet after the housing crisis because of how tight underwriting standards have contracted. About half of jumbo mortgage applications are rejected due to the quality of the borrower. Jumbo investors look for the pristine borrower, with a 70% or 80% loan-to-value ratio, flawless proof of income and an above average credit score. "The products are there, the demand is there and the rates are low," Millon said. "It's just slow." Currently, about half of the jumbo market is agency funded with the other half privately funded. One thing Millon believes would encourage more private lending in this sector is a continual drop in agency loan limits. Reverting back to the $417,000 cap set in 2006 may relinquish enough jumbo volume to the private sector to spark a jumbo securitization market, he said. Last year, Redwood Trust issued a jumbo mortgage-backed securitization and another this year. The general market feeling is that such deals will be few in number and hardly represent a trend toward structured finance. "That would be a boom to the private securitization market," Millon said. "That coming out of (Treasury GSE reform) could be remarkable." That's unlikely to happen anytime time soon, he admits. The jumbo market is almost exclusively portfolio lending at this time, meaning lenders have enough capital to hold the jumbos on their balances sheets. Big banks such as Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C), as well as real estate investment trusts like BlackRock (BLK) and Annaly Capital Management (NLY), dominate the market in terms of volume. Millon estimates that these portfolios could absorb $400 billion alone in 2011. Millon said jumbo loan securitization lies dormant because there simply aren't enough jumbo loans being originated. In 2010, there were only $82 billion non-agency jumbo loans originated, according to data from Inside Mortgage Finance. That figure is down from a 2003 peak of $650 billion. Millon said he expects to see a jumbo residential mortgage-backed securities market manifestation by the end of 2011, "but certainly not a resurgence." The resurgence will come, he said, when macroeconomic factors such as unemployment play in the mortgage market's favor. Stay tuned for the upcoming edition of HousingWire to hear from other industry movers and shakers on their thoughts about the jumbo mortgage market. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR. Disclosure: The author holds no relevant investments.