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Jumbo Market Altering And Not For The Better

Friday, July 29, 2016 - Article by: bcahoone - Global Home Finance Inc - Message

Outside a Muffler Shop: "No appointment necessary. We hear you coming."

In a Veterinarian's waiting room: "Be back in 5 minutes. Sit! Stay!"

At the Electric Company: "We would be delighted if you send in your payment on time. However, if you don't, YOU will be de-lighted."

In a Restaurant window: "Don't stand there and be hungry; come on in and get fed up."

In the front yard of a Funeral Home: "Drive carefully. We'll wait."

At a Propane Filling Station: "Thank Heaven for little grills."

In a Chicago Radiator Shop: "Best place in town to take a leak."

On an Electrician's truck: "Let us remove your shorts."

"Buy land - they're not making any more of it." And the reverse is happening in Louisiana. Say what you want about global warming, or inappropriate levy building, the fact is that the state is watching a football field-sized piece of land disappear under water every hour. Per the Smithsonian Magazine Louisiana is losing 75 square kilometers of coastal terrain every year. And in California this article points out a mining company is "stealing a beach."

The International Monetary Fund and US regulators have given Deutsche Bank heat for risks posed by its 42 trillion euro derivatives portfolio, which among other factors contributed to it failing Federal Reserve stress tests. Analysts wonder if Deutsche Bank would do well to abandon its US businesses, but it has little else generating profits and is the last European holdout in the investment banking market.

And in other news that isn't particularly good for lenders, especially for non-bank companies who offer jumbo loans, Two Harbors Investment Corp. is discontinuing its Agate Bay jumbo securitization platform. The company notes that expected costs to wind down the program will be around $3 million in the second half of 2016, and expected savings will run around $10-11 million annually.

Why is TWO "bailing and sailing" from jumbo? The company stated that its reason for exiting the business is simply the challenging market environment confronting the jumbo securitization business. The demand to hold jumbo mortgages (mostly from banks) on balance sheets has resulted in very little jumbo production moving to the private label securitization market. Banks love the jumbo loan asset, and why pay rating agencies and attorneys thousands of dollars to securitize the loans? Banks flush with deposits have been willing to pay more for these loans than bond investors, making it more profitable for lenders to sell mortgages to banks than to securitize.

TWO sponsored 13 securitization deals backed by nearly $4 billion in prime jumbo mortgages since the program's inception in 2013. TWO has been among the more active issuers in the non-agency securitization space for loans without government guarantees, behind Redwood Trust and a group of large banks. Two Harbors, managed by a unit of hedge fund Pine River Capital Management, sold mortgage bonds under the name "Agate Bay Mortgage Trust."

Securities Industry and Financial Markets Association (SIFMA) reports that issuers sold about $60 billion of non-government residential mortgage bonds last year, compared with more than $1.24 trillion in 2006. Of that $60 billion, just $12 billion were traditional non-government mortgage securities. Late last year JPMorgan Chase & Co. analysts forecast that $10 billion of prime jumbo loan mortgage bonds would be sold this year but less than $2 billion of the securities have been sold through June, according to its data. Banks are happy to sit on this product.

Other lenders that packaged jumbo mortgages into bonds have also stepped back from that business, and it doesn't take long to find out what lenders & investors are selling to a particular "end" investor. "Effective on Friday, July 29, 2016 NewLeaf Jumbo Prime and Jumbo Prime High LTV products are discontinued. All loans must be locked by 4:00 p.m. (PDT) on July 28. Extensions will not be granted after July 28. Products impacted are NewLeaf Jumbo Prime - W530, NewLeaf Jumbo Prime High LTV - W531, and NewLeaf Jumbo Prime Asset Depletion - W532."

And NYCB Mortgage Banking sent out the word yesterday that, "Due to the immediate and unexpected closure of one of our investors, NYCB must suspend our Jumbo Fixed 30-Year loan program. Effective at 5:00 PM Eastern Standard Time (yesterday), NYCB will no longer accept new applications for the Jumbo Fixed 30-Year loan program." In order for NYCB to fund/purchase a jumbo 30-year fixed loan the loan had to have been locked, or expired loans relocked, yesterday.

Last week, Five Oaks Investment Corp., another real estate investment trust, said it was scaling back its unit. On July 21 Five Oaks Investment Corp., the publicly traded REIT parent of Five Oaks Acquisition Corp. (Five Oaks), released a Form 8-K filing stating that effective August 1, 2016, Five Oaks will not be purchasing additional prime jumbo mortgage loans and would not renew its warehouse agreements beyond October 2016. At this time, the REIT's decision to suspend its conduit operations is not expected to impact the OAKS 2015-2 securitization or KBRA's outstanding ratings for the transaction.

And WinWater Home Mortgage, a unit of hedge fund Premium Point Investments, shuttered its program earlier this year, citing similar challenges.

LOs know that borrowers who want a jumbo loan can find them. Much of the lending, of course, takes place on the East and West Coasts, within 10-20 miles of the ocean, or in nice suburbs of major cities. And some lenders specialize in jumbo lending, and have adjusted their underwriting guidelines to accommodate wealthy borrowers. For example, Bloomberg reports on a no-money down $2 million program in Northern California. Lenders are now taking into account stock and stock option compensation for determining whether a borrower can afford a mortgage. That's okay in an appreciating or stable housing market. Otherwise...

And there are changes in the conforming conventional world of Fannie Mae and Freddie Mac.

Fannie Mae has announced changes to its 3% down HomeReady program. There are several changes that go into effect immediately. Income limits have been raised to 100 percent of area median income (AMI) in all areas except for low income market tracts which have no limit. Fannie believes this will expand access to affordable credit and also make it easier for lenders to determine eligibility for the loans.

The occupant borrower will now be allowed to own other residential properties. Homeownership education courses that fulfill the HomeReady mortgage requirement have been expanded to include one-on-one pre-purchase advising from HUD-approved providers. Fannie Mae will offer lenders a $500 credit to encourage borrowers to take advantage of this option. Homebuyer education will continue to be available through Framework, Fannie Mae's education partner.

The requirement for homeownership education has been removed for limited cash-out refinances and borrowers for loans secured by two- to four-unit properties will no longer be required to take landlord education although homeownership education will remain a requirement.

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