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Interest rates for mortgages over $417,000 have fallen 11 basis points during the past six weeks, driven by competition among banks to win the mortgage business of wealthy, less risky borrowers and in turn, make them customers of other financial products.
July 29 -
Smaller banks face a tricky choice with jumbo loans: hold them and face rate risk, or sell them to a bigger bank and risk losing a customer. An unusual arrangement between the FHLB and a REIT could offer community banks a better route.
June 16 -
LenderLive Network is expanding its correspondent lending channel by offering to buy jumbo mortgages from members of the Independent Community Bankers of America.
June 11
WASHINGTON Redwood Trust and the Federal Home Loan Bank of Chicago are revving up a program to buy and securitize jumbo loans and looking for signs that other FHLBs will participate.
"We are currently working with the Federal Home Loan Bank of Chicago to identify early participants and working through operations," said Martin Hughes, the chief executive of Redwood, in a conference call on the company's second quarter earnings. "We expect to begin acquiring loans from this [jumbo] program in the fourth quarter."
So far, it appears some of the Home Loan banks are receptive, but most are being coy about their intentions and taking a wait and see approach. The Atlanta Home Loan Bank said Friday it is "actively exploring" the jumbo program, while the Topeka and New York banks said they are monitoring it closely.
At issue is the ability of the Home Loan Banks to move mortgages off their balance sheet, a problem that has hampered the Mortgage Partnership Finance program in the past.
Under the pilot program, which received regulatory approval in June, the Chicago bank will purchase jumbo loans from member institutions and then sell it to Redwood, which will securitize them and sell them into the private-label mortgage market.
The Mill Valley, Calif.-based real estate investment trust is looking to buy prime jumbo loans with balances between $417,000 to $729,750.
If the pilot program is successful and receives final approval by the Federal Housing Finance Agency, the other nine Home Loan Banks that participate through the MPF program could elect to participate in the new jumbo program, dubbed MPF Direct.
To date, however, only the Chicago bank has signed on.
Dan Hess, a senior vice president for the Topeka Home Loan Bank said it is "supportive of this product; however we haven't announced an intent to offer the product to our members.
"We are assessing the needs of our members and the market opportunity in the Tenth District," said Hess. "We also are developing a better understanding of the pricing and execution."
Connie Waks, a spokeswoman for the Seattle Home Loan Bank, said it was "pleased to see this enhancement to the program, and we will be watching closely as the Chicago FHLBank and Redwood implement the offering to evaluate its potential benefits for our members."
The Seattle regional bank currently uses the MPF Xtra program, which the Chicago Home Loan Bank runs as a conduit for selling conventional loans to Fannie Mae.
The Atlanta bank said that it was focused on implementing the Fannie-based MPF Xtra program, calling it a "strong product offering." But it was clearly keeping an eye on the MPF Direct program for jumbo loans.
"We are actively exploring each opportunity that benefits our shareholders including the jumbo program," said Sharon Cook, a spokeswoman for the bank.
Other Home Loan Banks appeared more circumspect in their plans.
"The Federal Home Loan Bank of Boston is in the process of analyzing it," said spokesman Mark Zelemyer.
The New York Home Loan bank said it is also monitoring the new jumbo program while the San Francisco bank declined to comment.
The Home Loan Banks may be wary of such programs given their experience with highly rated private-label MBS stuffed with subprime and other risky mortgages in the run up to the financial crisis.
The 12 regional banks combined held $71.5 billion (unpaid principal balance) in private-label securities at yearend 2008, which represented 60% of their investment portfolios. (Private-label securities are also called residential MBS or RMBS.)
By yearend 2011, the FHLB holdings of prime, subprime and Alt-A RMBS totaled $37.1 billion with an estimated default rate of 39% and loss severities of 44.5%.
Overall, the Home Loan Banks' Office of Finance estimates the system has withstood $4.6 billion in losses from 2008 through the first half of 2014 due to PLS investments.
Today, the Home Loan Banks still hold $23 billion in legacy RMBS, but the bleeding has nearly stopped. They reported a loss of just $6 million on their PLS holdings during the first half of 2014. (Due to litigation pursued by the FHFA against PLS issuers, the FHLBs received $266 million in settlement funds in 2013 and the first half of this year.)
But the MPF Direct program is a conduit program that will funnel prime jumbo loans into the PLS market so the Home Loan banks won't have to hold the private label securities on their books.
Meanwhile, the PLS market today is small and risk adverse. Redwood Trust has securitized nearly $9.2 billion in prime jumbo loans in 23 private-label transactions since mid-2010.
Kroll Bond Rating Agency has rated 20 of 23 Redwood's jumbo securitizations since 2012.
Only one of the 23 Redwood's pools has loans that are currently 60-days or more past due as of the end of July, according to Kroll senior director Michele Patterson. That 2011 transaction has a 0.76% 60-day plus delinquency rate.
"Some of the other jumbo securities have borrowers that have gotten behind on their payments, but have cured," Patterson said in an interview.
She also noted that Two Harbors, Citigroup, Credit Suisse, JPMorgan Chase, Morgan Stanley, Winwater and Redwood have issued 12 jumbo residential mortgage backed securities totaling $3.5 billion during the first seven months of this year. Redwood is the issuer behind two of the 12 RMBS deals. Both of Redwood's deals were backed with about $300 million in mortgages.
Redwood Trust has gained access to Home Loan Bank advances through its wholly-owned insurance subsidiary RWT Financial LLC to fund some of its mortgage purchases.
As of July 31, "we had utilized $26 million of FHLBC advances to fund $30 million of jumbo residential loans," Redwood said in its second quarter securities filing.
In future periods, the mortgage REITs might use advances to fund MPF Direct jumbos.
"Any limitation on RWT Financial's ability to borrow from FHLBC would not necessarily impact our ability to acquire MPF Direct loans," Redwood said.
The Chicago Home Loan Bank advances are collateralized by residential and commercial mortgages, as well as private-label RMBS, held by the Redwood insurance company.
