Wednesday, January 28, 2009

Banks and Investors Face 'Jumbo' Threat

--delinquency rate of Jumbo mortgages rose to 6.9% from 2.6% a year earlier, still low compared to 17% delinquency rate for subprime --delinquencies of non-jumbo prime loans climbed to 2.1% from 0.8% --from 2002 to 2006, avg 0.5 tril jumbo loans were originated every year and 40% was securitized By NICK TIMIRAOS Rising defaults by affluent homeowners are raising the specter of another cloud over banks and investors, which could get stuck with thousands of expensive homes. About 6.9% of prime "jumbo" loans were at least 90 days delinquent in December, according to LPS Applied Analytics, a mortgage-data research firm. The rate was up sharply from 2.6% a year earlier. In comparison, delinquencies of non-jumbo prime loans that qualify for backing by government agencies climbed to 2.1% from 0.8% in December 2007. Jumbo mortgages average about $750,000 and can run as high as $5 million or more. More borrowers with such loans are being hit by layoffs that are spreading through practically every sector and pay level of the U.S. economy. On Tuesday, the Labor Department reported that the jobless rate rose in December in all 50 states, hitting at least 10% in Michigan and Rhode Island. States that suffered the biggest jumps in unemployment in the past year include California and Florida, where the largest number of jumbo loans were made. That means trouble for banks that made those loans when times were good and investors who snapped up jumbo loans packaged into mortgage-backed securities. Defaults on jumbo mortgages tend to result in especially steep losses for lenders, because pricier homes are tough to sell in the current market. "There is more pain to come," says Herb Blecher, vice president of analytics at LPS. Last month, the mounting defaults prompted Moody's Investors Service to downgrade hundreds of tranches of prime jumbo loans sold to investors as securities. Moody's has downgraded more than 75% of all prime jumbo loans originated in 2006 and 2007 that carried the top rating of triple-A. Columnist/Builder Faces Financial Crisis Tightened lending standards on jumbo mortgages leave columnist Nancy Keates in a bind. Even foreclosure is a possibility, something unimaginable when she began building her Portland home. Read Teardown Diary. From 2002 to 2006, banks originated an average of $557 billion a year in jumbo loans, according to Inside Mortgage Finance, a trade publication. About 40% of the total was sold to investors as securities. Three lenders accounted for nearly half of all jumbo loans made in the first nine months of 2008. The top two originators, Chase Home Finance and Washington Mutual, both part of J.P. Morgan Chase & Co., made more than 25% of all jumbo loans, while Bank of America Corp. and Wells Fargo & Co. each accounted for 11% of the jumbo market. Some of the largest financial institutions held on to many of their loans. Last July, J.P. Morgan disclosed that it had $34.4 billion in jumbo mortgages. Chairman and Chief Executive James Dimon acknowledged that the New York bank expanded too aggressively into the market in 2007, particularly in places such as California, where home prices later collapsed. "We were wrong," Mr. Dimon says. "We obviously wish we hadn't done it." Jumbo mortgages aren't a big part of J.P. Morgan's loan business anymore; government-backed loans now account for more than 90% of originations. "We continue to make [jumbos] as an accommodation to customers," said spokesman Thomas Kelly. "It's not a big part of what we do." Jumbo loans shriveled when credit markets seized up in July 2007, and originations slid 71% to $87 billion in the first nine months of 2008, down from $303 billion a year earlier. Only 7% of the loans made last year were securitized, according to Inside Mortgage Finance. Originations are expected to fall even further in 2009. Earlier this month, Wells Fargo stopped buying jumbo mortgages originated by mortgage brokers. The San Francisco bank still is making loans through retail channels. Other big jumbo-mortgage lenders still are advertising their loans but have "intentionally priced themselves out of the market" by charging high rates, says Peter Boger, operating chief at Ridgewood Savings Bank. The Queens, N.Y., bank was one of several regional banks, including Hudson City Bancorp, of Paramus, N.J., and Astoria Financial Corp., of Lake Success, N.Y., that increased jumbo lending in 2008. Conforming-loan limits top out at $625,000 in the highest-cost housing markets. To buy a more expensive home, buyers must put up larger down payments -- between 30% and 40% -- and pay higher mortgage rates. Rates on 30-year fixed jumbo mortgages stood at 6.87% last week, compared to 5.34% for conforming mortgages, a difference of 1.53 percentage points, according to HSH Associates, a financial publisher. "Your potential community of buyers for a particular house ... is smaller because you've got fewer people who can afford the payment," says Jay Brinkmann, chief economist for the Mortgage Bankers Association. "That is going to have an impact on price." Some analysts believe tighter credit could be exacerbating jumbo defaults by making it harder to refinance. "Throughout 2008, even in the worst of market conditions, conforming borrowers had some access to refinancing," says Navneet Agarwal, a senior mortgage-backed securities analyst at Moody's. "But most of the private-label borrowers have been shut out." Nearly 25% of prime jumbo mortgages exceeded the value of the homes they backed in September, according to Credit Suisse. That figure would increase to 42% given home-price declines of 15% over the next two years. The delinquency rate on jumbo loans still is far lower than that of subprime mortgages and Alt-A loans, a category between subprime and prime. Both those delinquency rates now exceed 17%. Write to Nick Timiraos at

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