Jumbo spreads on 30-year fixed rate mortgages remain elevated at approx 100 basis points (1%) above conforming versus the historical spread of 12-37 basis points. Everyone knows that jumbo mortgages include loan amounts above $417,000 which exceed the requirements for Fannie / Freddie securitization, and since jumbo loans are ineligible for Agency MBS’s, they are less liquid. Interestingly, most prime jumbo mortgages are underwritten according to Fannie Mae guidelines, so in theory the credit risk between conforming and jumbo loans is similar which is why historical spreads were narrow. (So, in theory, the spread reflects the liquidity premium of the loan, not the default risk.) Jumbo AAA paper now commands 100bps premium since investor appetite has diminished and investors are nervous about the credit quality of any jumbo loan not guaranteed by one of the Agencies even if the originator claims the loan conforms to Agency underwriting standards. In addition, it appears that the spread is also due to reduced confidence in the ability of private insurers’ ability to guarantee the principal. Spreads narrowed for a time in October, but have since widened back out, an indication that the non-conforming mortgage market has shown little improvement since the crisis began in July.

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Unfortunately most rates have moved dramatically higher since the Fed rate cut. (Certainly there is no short-term correlation!) Heading into it, many analysts had predicted 1/2 point, and also the cut is unlikely to be of help in lowering mortgage payments. And even if rates drop, jumbo spreads remain elevated, and Fannie Mae and Freddie Mac have recently announced 2008 Loan Level Price Adjustments that are already starting to show up on lenders’ rate sheets. Fannie said the new fee is needed “to ensure that what we charge aligns with the risk we bear.” Mortgage insurers have raised premiums for certain borrowers and tightened standards. PMI Group Inc. has stopped writing mortgage insurance for borrowers with credit scores below 620 who are financing more than 95 percent of their home’s value. Triad Guaranty Insurance Corp. has stopped providing mortgage insurance on option adjustable-rate mortgages, which carry low introductory rates but can lead to a rising loan balance. MGIC has reduced LTV caps.

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Indymac announced broad, dramatic changes to their product guidelines yesterday. For example, for Alt-A Preferred & Alt-A Preferred No MI, “No Ratio” documentation has been eliminated, and NINA Documentation has been eliminated. For Alt-A Jumbo & Alt-A Jumbo No MI, Stated Income documentation has been reduced to a maximum 75% LTV/CLTV, No Ratio Documentation has been eliminated, NINA Documentation has been eliminated, but Full Documentation remains unchanged. For their Super Jumbo program, Stated Income documentation has been reduced to a maximum 75% LTV/CLTV.

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Countrywide released its November production numbers, reporting that loan production totaled $23 billion, a 40% decline from that of November 2006. Retail production fell 29%, wholesale 55%, and correspondent 46%.

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In good news for borrowers, Countrywide’s Mozilo said Thursday that his company cannot pass on all additional guarantee fee charges to the lender’s customers. “You have to try and pass on those costs, but it’s tough in this market. You cannot pass on the entire cost.” But other investors are following FNMA’s lead in delivery charges. Wells Fargo announced that they will, in less than a month, apply those fees to all agency loans. For Best Effort Deliveries, Wells will pass through this .250 fee in their Best Effort 60-day price and an adjusted amount to their 30- and 15-day price

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..

A guy walks into a bar wearing a 49ers jersey and carrying a cat that’s also wearing a 49ers jersey.
The guy says to the bartender, “Can my cat and I watch the 49ers game here? My TV is broken and my cat and I always watch the game together”.
The bartender replies, “Normally, cats wouldn’t be allowed in the bar, but it’s not very busy in here right now, so you and the cat can have a seat at the end of the bar. But, if there’s any trouble with you or the cat, I’ll have to ask you to leave.”
The guy agrees, and he and his cat start watching the game. Pretty soon the Niners kick a field goal and the excited cat jumps up on the bar and walks down the bar and gives everyone a high five.
The bartender says, “Hey, that’s pretty cool! Does he do that for every field goal?”
The guy nods, “Yeah, every time.”
The bartender asks, “What does he do for a touchdown?”
The guy answers, “I don’t know, I’ve only had him for 3 years.”

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Rob Chrisman   rchrisman@rpm-mortgage.com   925-295-9380