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Still Hard Times For Jumbo MBS
Why wouldn’t investors want to gobble up securities made up of jumbo loans? Well, how about delinquencies? In a story out of Business Week, “US prime jumbo mortgages at least 60 days late backing securities reached 9.6% in January from 9.2% in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings.” This is almost 3x the rate in 2008. Folks in the business know that non-agency securities don’t have the guarantees/insurance of Freddie, Fannie or Ginnie Mae. So where do these beasts trade? According to the article, last March they hit a low of .63 (so a loss of almost 40 cents on the dollar versus the original principal balance) but are now up into the low 80′s.

This raises the question “Why would an investor buy a pool of mortgages?” In the past, banks, who were, and still are, making fees on originating the loans, didn’t have to hold on to them, but instead could pool them and make them attractive to buyers. The buyers did not hold the individual mortgages, but parts of huge packages of them. Kind of like thinking about how delicious the Orange Chicken is at Panda Express and not having to think about how it got there. On top of that, the rating agencies told investors that the pools were safe, especially so in light of recent appreciation trends. Unfortunately now the rating agencies can’t quite say that, and are having difficulty trying to figure out how to rate any pool of mortgages. more…